Mainland deflationary pressure persists as growth slows

A Chinese measure of economy-wide prices marked its longest slide since 1999, underscoring deep deflationary pressures weighing on China as economic growth in the fourth quarter grew slower than estimated, raising doubt on the effectiveness of the economic stimulus.

Fixed assets investment increased by 3 percent yearly last year. But investments from Hong Kong and Macau businesses declined 2.7 percent. Those from foreign investors inched up 0.6 percent.

China's fourth-quarter economy grew 5.2 percent, missing market estimates, as domestic demand remains insufficient.

Consumption growth slowed down in December with a rise of 7.4 percent, versus 10.1 percent in November.

Industrial profit continued to rise in December with a month-on-month growth rate of 0.52 percent and a year-on-year growth rate of 6.8 percent, higher than the expected 6.6 percent.

Raymond Yeung Yu-ting, chief economist of The Australia and New Zealand Bank's Greater China, deemed that consumption growth continued to slow last month while industrial profit growth accelerated, driven by upstream price deflation, marking that stimulus policies have not yet taken effect.

Yeung added that the unemployment rate of young people in the mainland remains high and the disposable income of urban residents, after deducting the price factor, has only risen by 4.8 percent, reflecting that residents are still tightening their belts.

Sid Mathur, head of Asia macro strategy and emerging market research at BNP Paribas, calls it a "narrative trap" that's grown after Chinese policymakers doled out large and targeted fiscal stimulus during downturns in the past few decades. It's different now, he says, with stimulus of a lower magnitude and aimed "much more to contain downside risks to long-term growth than to maximize short-term growth."

Though China's National Bureau of Statistics leader Kang Yi said more supportive measures can be taken, some analysts expect stronger stimulus.

Chaoping Zhu of JP Morgan Asset Management added: "Stronger fiscal stimulus is essential to support growth and market confidence."

Yeung also said that if the central government wants to set the economic growth target at around 5 percent this year, it will need to step up policy support.

It is suggested that the mainland should adjust its overall policy line, otherwise the short-term fiscal and monetary policy support will only be a drop in the ocean.

On Monday, The People's Bank of China surprised the market by leaving the medium-term policy rate unchanged at 2.5 percent to prevent the yuan from further weakening. However, it is expected to cut the reverse requirement ratio soon and rate cut later this year.