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China's factory prices fall faster as weak demand hits economy

AFP/File / FRED DUFOUR China's producer price index, that measures the cost of goods at the factory gate, dropped 0.8 percent on-year in August, following a 0.3 percent drop in July

The prices Chinese firms pay factories for their goods fell last month at the fastest pace in three years, official data showed Tuesday, as slackening demand and the bruising US trade war drag on the economy.

Consumer prices were also broadly subdued and only supported by a surge of almost 50 percent in the price of pork caused by African swine fever that has ravaged the country's pig industry.

The producer price index (PPI) -- an important barometer of the industrial sector that measures the cost of goods at the factory gate -- dropped 0.8 percent on-year in August, following a 0.3 percent drop in July.

A slowdown in factory gate inflation reflects sluggish demand, while a turn to deflation could dent corporate profits and drag on the world's number two economy, which in turn could lead to a drop in prices globally.

While the figure from the National Bureau of Statistics (NBS) marked the second consecutive month of decline, it was slightly better than the 0.9 percent fall forecast in a Bloomberg News survey.

Last month was the first time the PPI had fallen into negative territory since August 2016.

AFP / NIKOLAY DOYCHINOV Pork prices have surged in China as the country's pig industry is hammered by an outbreak of African swine fever

Petroleum and natural gas mining, and coal and other fuel-processing sectors led the drop, NBS official Shen Yun said in a statement, indicating weakness in manufacturing.

However, consumer price index (CPI) -- a gauge of retail inflation -- rose 2.8 percent last month, stabilising from July and beating forecasts.

But while meat and egg prices rose as traditional Chinese mid-autumn festival approaches, pork was the key driver, shooting up 46.7 percent on-year owing to a shortage in supply of the staple, Shen said.

The country's pig industry has taken a heavy hit from a mass outbreak of African swine fever that has seen huge amounts of the animals culled in recent months, causing China to begin relying on imports.

AFP/File / STR The People's Bank of China on Friday said it would cut the amount of cash lenders must keep in reserve saying it would help release more than $100 billion into the stuttering economy

Julian Evans-Pritchard of Capital Economics said that further easing measures are likely as pressure in demand and factory-gate deflation deepens.

"Weakening demand dragged producer price inflation further into negative territory last month while surging pork prices kept consumer price inflation elevated," he said in a note.

"With demand-side pressures on prices increasingly subdued, we think that further monetary easing is on the horizon."

The People's Bank of China on Friday said it would cut the amount of cash lenders must keep in reserve saying it would help release more than $100 billion into the stuttering economy.

China also confirmed last week a new round of trade talks will be held in Washington in early October, in an attempt to patch up the trade tensions between the world's two biggest economies.

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