Deflation risk warning as CPI growth eases

China's inflation moderated to a four-month low in August, with an analyst warning that the country faces higher deflation risks and calling for policies to ease to counteract any further economic slowdown.

The Consumer Price Index, the main gauge of inflation, grew 2 percent from a year earlier in August, the National Bureau of Statistics said yesterday. The rate eased from the gain of 2.3 percent in both July and June, and turned out to be the slowest since April.

The Producer Price Index, the factory-gate measurement of inflation, fell 1.2 percent year on year last month, the bureau said. The fall widened from the decrease of 0.9 percent in July, also indicating less inflationary pressure ahead.

However, Zhou Hao, an economist at Australia & New Zealand Banking Group Ltd, said China is facing increased risk of deflation. This risk reinforces the call for more policies — such as cuts in reserve requirement ratio so that banks can have more credit in hand — to ease.

"As China's inflation continues to trend down, we maintain our call that the central bank needs to cut the reserve requirement ratio for the whole banking system soon to tackle the deflation risk," Zhou said.

"Such a cut will also facilitate an orderly de-leveraging in the shadow banking activities and help lower overall funding costs to support economic growth."

But the central bank seemed reluctant to ease policies further as it expected to grow money supply reasonably, and viewed the current growth of M2, which measures broad liquidity conditions, as sufficient to deliver a decent growth.

On Wednesday, Premier Li Keqiang said the government was not distracted by the minor fluctuations in individual performance indicators, suggesting more supportive policies were less likely.

Chang Jian, an economist at Barclays, also saw "downside risks to August data. It is because last month's weak imports reflected soft domestic demand."

Earlier data showed that China's manufacturing sector grew at a slower pace for the first time in August since February, and imports shrank 2.4 percent, deteriorating from the 1.6 percent drop in July.