China's CPI falls to -0.5% in November, first decline since 2009

China's consumer price index (CPI), a key gauge of retail inflation, fell to minus 0.5 percent in November from a year earlier, the National Bureau of Statistics (NBS) said on Wednesday. It entered negative territory for the first time since October 2009, as food prices dropped.

The fall in November was compared with the 0.5-percent rise in October, as the Reuters poll predicted no change in consumer prices. The decline was also below the 0-percent fall forecasted by the Bloomberg survey.

"China's consumer inflation in November surprised the market by entering negative territory — a result from rapidly improved pork supply as well as a weaker-than-expected domestic consumer market," Wang Dan, chief economist with Hang Seng Bank (China) told CGTN.

The fall in CPI was due to the high comparison base in the same period last year, according to Dong Lijuan, a senior NBS statistician. It was led by a 2-percent decline in food price, including a 12.5-percent drop in pork price and a 19.1-percent decrease in egg price.

The negative CPI inflation in November does not mean China's economy is experiencing deflation, according to Lu Ting, chief China economist at Nomura.

"Instead of deflation, we believe China has started a reflationary stage, real yield is not rising, markets should focus more on sequential price movement instead of the misleading year-on-year price changes. And the central bank is unlikely to overreact to the base-effect driven negative year-on-year CPI inflation reading," Lu told CGTN.

Lu explained that the surge of pork prices in the fourth quarter of 2019 created a huge base effect which makes the recent year-on-year changes in the CPI much less meaningful. If pork was excluded from the CPI basket, CPI inflation remains positive at 0.1 percent, Lu said.

The slump of global crude oil prices was also an important driver of the decline in headline CPI inflation. Core CPI inflation, which excludes both food and energy, remained at 0.5 percent year on year in November, according to Lu.

From a sequential perspective, commodity and energy prices have been on the rise, with crude oil and iron ore prices up by 20-30 percent since the beginning of November. The high-frequency data also points to sequentially higher pork prices in December, Lu added.

"Rental prices continued to decline, reflecting slowed migration and severe challenges in the job market. This is consistent with the employment PMI in November: company hiring has been shrinking since May. Wage levels will also likely decrease at a faster pace. We have to be alerted on the possibility of more delayed payments or defaults in consumer loans in the coming months," Wang told CGTN.

The country's producer price index (PPI), which measures goods cost at factory gate, slowed to minus 1.5 percent in November in annual terms, compared with the 2.1-percent fall in October, according to the NBS.

The PPI index was expected to ease 1.8 percent tipped by the Reuters poll.

"Factory-gate prices improved further in November on the back of rising demand for factor inputs. Prices for raw materials such as cotton, chemicals and metals have climbed rapidly in the past few months," Wang told CGTN.

China's economic recovery gathered pace in the third quarter of 2020, with GDP growth in July-September hitting 4.9 percent in annual terms, boosted by investment and exports. The growth beat the second quarter's 3.2 percent, which reversed the first contraction of 6.8 percent in the first quarter.

China continues to be the only economy in the world to have positive growth in 2020 as its GDP is predicted to expand 1.9 percent this year, according to the latest economic outlook released by the International Monetary Fund (IMF) in October.

China's exports in November rose at the fastest pace since February 2018, helped by strong global demand for industrial products and raw materials, data from the General Administration of Customs showed Monday.

Exports surged by 21.1 percent year on year to $268 billion, beating forecasts. A Reuters poll earlier predicted a 12-percent growth in exports in November, while China International Capital Corp. Ltd. forecast a 10.8-percent increase.

Lu expected headline CPI inflation in December to rebound to zero or into slightly positive territory, given the temporary relief from unfavorable base effects and likely sequentially higher prices for pork and energy products.

PPI inflation in December could rise further to around minus 1.0 percent year on year, according to Lu.

"We now expect the 2020 consumer inflation to be 2.3 percent, much lower than the government target of 3 percent for the year. With the deflation pressure, along with the RMB appreciation, monetary expansion in the coming months becomes more likely," Wang told CGTN.

Lu expected CPI inflation to remain slightly negative throughout spring 2021, but gradually increase to 1.5-2.0 percent towards end-2021. PPI inflation will likely turn positive in the second quarter of 2021 and stay around 2.0 percent before end-2021.

Wang expected the PPI to continue to improve into 2021 driven by construction projects and rising foreign demand.

(CGTN's Heather Hao contributes to graphics.)