Analysts say fall in producer prices is a concern

China's November consumer price index eased to a three-month low of 3 percent year-on-year from 3.2 percent in October, amid relatively weak demand, the National Bureau of Statistics said on Dec 9.

However, analysts say that the continuing deflation of factory product prices is a matter of concern.

The producer price index contracted 1.4 percent in November from a decrease of 1.5 percent in October. The index has remained in negative territory for 21 consecutive months, according to the NBS.

The long-term PPI deflation indicates serious problems of industrial overcapacity and weak market demand, which may deeply influence the development of the real economy, says Lu Fengyong, a researcher at the national academy of economic strategy at the Chinese Academy of Social Sciences, a government think tank.

Qian Shaotian, a sales manager with Shanghai Yuanzong Hardware Co Ltd, which sells hardware products mainly to European clients, says that overcapacity has been a common problem in his industry.

Qian says the company has been trying to sell its products online to individual buyers at much cheaper prices to reduce high inventories and become more competitive.

Wu Yue, a manager at Shanghai Zaiwang Steel Co Ltd, has been facing similar difficulties.

"The government has been continuously reducing the launch of infrastructure construction projects this year, which directly affects the demand for raw materials, especially steel," he says.

As demand from the domestic market remains weak, Wu's company expects to see a 15 percent loss after shutting down one of its three production facilities in September.

"If we don't see a market recovery next year, we'll probably close down the business to prevent further losses," Wu said.

In November, about 1.92 percentage points of the overall inflation growth was attributed to higher food prices, which increased 5.9 percent year-on-year, slower than the 6.5 percent hike seen in October, the NBS said.

Non-food prices rose 1.6 percent last month from a year earlier, unchanged from October.

The lower CPI figure in November brings the first 11 months' reading to 2.6 percent, compared with the government's whole-year target of 3.5 percent, which means that headline inflation remains manageable in the near term, says Zhu Haibin, chief economist in China at JPMorgan Chase & Co.

Qu Hongbin, chief economist in China at HSBC Holdings Plc, says that the recent moderate inflation pressures imply that policymakers will continue to focus on measures to support growth and employment while implementing structural reform policies.

"While the sustainability of the improvement in external demand remains uncertain, it could only lend limited support to China's growth recovery, seeing that domestic demand remains the key driving force," Qu says.