PPI Reflects Modest Recovery in November

Shoppers buy vegetables at a supermarket in Lianyungang, Jiangsu province. (GENG YUHE/FOR CHINA DAILY)

In November, China experienced a slight increase in factory-gate prices, signaling the first such rise in six months. This change offers evidence that recent economic stimulus measures have helped improve industrial demand, although consumer inflation appears to be lagging behind, according to analysts and officials.

Looking ahead, expected interest rate cuts could further reinforce this recovering demand, while a short-term reduction in the reserve requirement ratio (RRR) of banks is anticipated. Analysts observe that a recent meeting by the Political Bureau of the Communist Party has indicated a shift toward a more "moderately loose" monetary policy for the first time since the global financial crisis of 2007-09.

The producer price index (PPI), which tracks factory-gate prices, showed a month-on-month increase of 0.1 percent in November, reversing a 0.1 percent decline noted in October. Overall, this marked the first positive figure since May when the PPI had risen by 0.2 percent.

Additionally, the year-on-year decline of the PPI decreased to 2.5 percent in November, an improvement from 2.9 percent in October, showcasing the first upward trend in five months and surpassing many analysts' projections.

According to Dong Lijuan, a statistician at the National Bureau of Statistics (NBS), "A series of existing and incremental policies continued to show their effects. Real estate and infrastructure projects have accelerated, resulting in rising prices for cement, nonferrous metals, steel, and other industrial products. "

Wen Bin, chief economist at China Minsheng Bank, commented, "November's PPI demonstrated improvements both year-on-year and month-on-month, indicating the beneficial effects of various incremental policies on output."

The NBS reported that within the smelting and rolling processing sectors, prices for nonferrous metals and ferrous metals increased by 1.2 percent and 0.2 percent month-on-month, respectively, in November.

However, there are concerns regarding consumer demand. Wen noted that the consumer price index (CPI) has dropped, reflecting weak domestic demand and low consumer confidence, with an ongoing negative output gap (where production is below potential). The CPI, a key indicator of consumer inflation, fell by 0.6 percent month-on-month in November—marking an eight-month low—compared to a 0.3 percent drop in October, influenced largely by reduced food prices due to unusually warm weather and decreased travel activity.

On a yearly basis, CPI growth fell to a five-month low of 0.2 percent in November, disappointing expectations. The core CPI, which excludes food and energy, rose by 0.3 percent year-over-year in November, up from 0.2 percent in the previous month, suggesting a slight improvement in consumer demand but still indicating sluggishness.

Wen emphasized that the data reveals the fragile nature of the recovery in industrial production, underlining the necessity for enhanced countercyclical policy adjustments.

In recent developments, a meeting by the Political Bureau of the Communist Party of China examined economic strategies for 2025. This meeting stressed the importance of adopting a more proactive fiscal policy alongside a moderately loose monetary approach, marking a shift away from previously emphasized caution in monetary policy.

Feng Jianlin, chief economist at Beijing FOST Economic Consulting, remarked, "This shift toward a 'moderately loose monetary policy' is a first since the global financial crisis. We expect monetary easing to intensify in 2025 compared to this year."

Lou Feipeng, a researcher at Postal Savings Bank of China, notes the possibility of cumulative interest rate cuts, predicting reductions of 50 basis points next year given the current high real-term interest rates, adjusted for inflation. He suggests that larger cuts may be forthcoming, particularly in the first half of the year.

Lu Ting, chief economist at Nomura, anticipates a 50-basis-point reserve requirement cut by the year's end, along with two more similar reductions in 2025.

Ming Ming, chief economist at CITIC Securities, expects the central bank to amplify its unconventional easing tactics, including purchasing treasury bonds.

Looking ahead, inflation figures are projected to recover in 2025, albeit remaining subdued in December. Ming has predicted a year-on-year average CPI growth of 0.76 percent and PPI at 0.94 percent for the year.

PPI, Recovery, Economy