China's producer price index (PPI) is expected to drop by 6 percent in October from a year earlier, 0.1 percentage point more than in September, according to forecasts from a range of institutions.
For the whole year of 2015, the index may fall 5 percent, expanding 3 percentage points from 2014. As analysis show that affected by the negative growth of PPI in over three years running, the real economy is struggling with a weak recovery and although the monetary policy has been eased all the way, its effect has not been transmitted to the majority of enterprises.
Under the pressure of slowing economic growth, more stimulus measures will be taken at once, experts predict. Although oil prices rebounded in October, prices of coal, steel, chemical products and other production materials have been staying at low levels, and deflation in the industrial sector will continue, experts believe. The Bank of Communications forecasts the PPI will decrease 6.1 percent in October.
It also says that commodities prices still have potential to decline and the drop of the price index for purchasing raw materials has accelerated due to imported deflation. For the whole year, it predicts the PPI may fall between 5 percent and 5.4 percent.
Over 40 months of negative PPI growths have exerted a serious influence on the real economy. The deflation in industrial sector has caused profits of non-financial companies lower than financial costs, led to a falling value of collateral and rising ratio of bad loans in banks, made it difficult for a huge amount of money to enter into the real economy and further worsened the debt burdens of enterprises and local governments, said Zhang Ping, vice director of the Institute of Economics of the Chinese Academy of Social Sciences.
The deterioration of profitability of industrial companies has also been transmitted to downstream companies, general equipments, special equipments, automobile and machinery building industries have all been affected, says Dong Wenyan, an analyst at China Academy of Telecommunication Research.
China's central banks have lowered the interest rates and the RRR for several times this year, but it's still far from enough, says Xu Gao, chief economist at Everbright Securities. In his opinion, the weak investing willingness of the real economy has slowed the transmission speed of the monetary easing policies to the real economy and when the transmission effect works remains to be observed.
Xu believes against the headwinds to the economy, more stimulus policies are in expectation. On one hand, more measures will be applied to channel funds from the financial system to the real economy and relieve financing pressures; on the other hand, proactive fiscal policy will be further implemented to coordinate with monetary policy. He also predicts that the central bank is likely to cut the RRR again to replenish domestic liquidity against the capital outflows.
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