Producer-price inflation in China is slowest in 2 years

Prices at the factory gate rose 2 percent in November from a year earlier, the statistics bureau said Wednesday, after gaining 6.6 percent in October.

That was less than the 4.5 percent median estimate of 15 economists surveyed by Bloomberg News.

Cooling inflation gave the central bank room to slash interest rates by the most in 11 years last month to counter a deepening slowdown in the world’s fourth-biggest economy. A global recession is cutting demand for exports just as falling property prices and sales slow construction and consumption at home.

“China may face deflation next year, which could be problematic, and the government is trying to avoid it,” said Isaac Meng, senior economist at BNP Paribas SA in Beijing.

“Inflation is no longer an issue for policy makers; the global recession and a slump in the property market have dragged down demand and prices for industrial goods.”

Foreign direct investment in China fell 36.5 percent in November from a year earlier, the commerce ministry said Wednesday, as economic growth cooled and gains by the yuan stalled against the dollar. Investment was US$5.3 billion, the least in 14 months.

The CSI 300 Index of stocks climbed 0.5 percent as of 1:38 p.m. in Shanghai on speculation that interest rates will be cut further to boost growth. The yuan rose to 6.8632 against the dollar from 6.8651 before the producer-price announcement.

China’s Yunnan Tin Co., the world’s biggest producer of the metal, said Tuesday that it had suspended output at its smelter for at least a month because of falling prices.

“In 2009, there is a possibility that China’s producer- price inflation could temporarily dip into negative territory, given the sharp fall in commodity prices,” said Jing Ulrich, chairwoman of China equities at JPMorgan Chase & Co. “However, a potential increase in electricity tariffs in the New Year would keep price inflation for producers at a higher level than for consumers.”

The central bank last month reduced borrowing costs for a fourth time since mid-September, leaving the key one-year lending rate at 5.58 percent and the deposit rate at 2.52 percent.

“There is still a lot of room for the central bank to cut interest rates,” said Meng, of BNP Paribas.

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