Business / Economy

China still faces deflationary pressures

(Xinhua) Updated: 2015-12-09 17:21

Falling commodity prices aside, sluggish domestic demand is the main factor weighing on PPI inflation, HSBC said in a research note.

Prolonged deflation will pose risks to the economy by eroding growth potential and might also put the economy at risk of a downward spiral, HSBC said.

Dragged down by sluggish demand, weak exports, a property downturn, China's economy expanded by 6.9 percent year on year in the third quarter of 2015, the lowest quarterly growth in six years.

To combat the economic slowdown, the central bank has cut the benchmark interest rates and the reserve requirement ratio of banks several times since the beginning of the year.

HSBC said more aggressive policy easing is still key to stabilizing growth in the coming months.

"We forecast another 100 bps (basis points) reserve ratio cut for the rest of 2015," HSBC said, adding that it expects another 50 bps policy rate cut and 400 bps reserve ratio cut as well as a bigger fiscal deficit in 2016.

A report from investment bank CICC also said that continued deflationary pressure in manufacturing prices requires further monetary easing.

"More importantly, fiscal policy will have to pull more weight towards stabilizing growth," the CICC said.

There is ample room for more measures to combat deflationary pressure, such as reserve ratio cuts, relief in tax and fees, fiscal spending, as well as a substantial increase in sovereign and policy bank bond issuance, the CICC said.

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