China's producer price index dropped 0.8 percent from a year earlier in August, widening from a 0.3 percent decline seen in July and the worst year-on-year contraction since August 2016, but pork prices jumped about 47 percent, prompting the consumer price index to rise 2.8 percent from a year earlier, government data showed.
Factory-gate prices fell deeper into deflationary territory and reinforced the urgency for Beijing to step up economic stimulus as the trade war with the United States intensifies.
Analysts say flagging demand at home and abroad is forcing some Chinese businesses to slash prices to win new orders or cut output to contain costs, chipping away at already-lean profits and further dampening business confidence, and the fall was mainly driven by weakness in raw material prices, especially for energy and metals.
In terms of enterprises, mainland aluminum extruded product provider Midas (1021), whose debt has been defaulted in December 2017 and bankrupted in March, has borrowed 20 million yuan (HK$22 million) from its employees to purchase raw material, without paying the wages for two months, reported by mainland media.
Surging food prices and higher consumer inflation will not be a barrier to policy easing, and most analysts expect pork prices to continue rising as supply plummets, spilling over into prices of other food items.
While mainland imports accounted for 54.3 percent of Hong Kong's total imports in June, bringing worries about possible stagflation, under which scenario the inflation rate is high but the economic growth rate slows.
Fitch Ratings predicts that China will see growth slowing to 6.1 percent this year and 5.7 percent next year, while China may introduce more stimulating policies such as Required Reserve Rate cuts and infrastructure spending.
The institution expects that the Chinese government will stop short of the type of credit-led policies which could exacerbate medium-term financial and economic imbalances, remaining a downside risk to the rating in 2019-2020.