(Yicai Global) Dec. 9 --China's consumer prices unexpectedly turned negative last month for the first time in 11 years.

The Consumer Price Index fell 0.5 percent in November from a year ago, according to data the National Bureau of Statistics published today. That was the first deflation since October 2009 and compares with an average 0.03 percent increase expected by 24 chief economists at major Chinese financial institutions polled by Yicai Global.

The CPI fell 0.6 percent last month from October, the NBS said.

China’s inflation rate had been slowing since reaching 2.7 percent in July. In October, the CPI inched up 0.5 percent, an 11-year low. Last month’s CPI was pulled down by food prices, as the cost of pork dropped for a second month in row after steep gains this year and last, as well as lower crude oil costs.

The higher base last year greatly contributed to the deflation. Food prices fell 2 percent last month, compared with a 2.2 percent increase in October, leading to a 0.44 percentage point decline in the CPI, the main reason for its yearly rise and fall.

The falling cost of pork, a main source of protein in China, was a major drag on the CPI, said Li Chao, chief economist at Zheshang Securities.

Pork prices fell 12.5 percent last month, faster than October’s 2.8 percent decline, shaving about 0.6 percentage off the CPI. Among non-food items, prices of communication devices and transport fuel fell 3.9 percent, with gasoline and diesel slumping 17.9 percent and 19.6 percent, respectively.

Pig Herds

An ongoing recovery in the supply of live pigs has pushed down pork prices, but the arrival of winter, the peak demand season, will stabilize prices to some degree in the short term.

The core CPI, which excludes food and energy, has remained stable, rising 0.5 percent annually for five straight months, according to Dong Lijuan, a senior statistician at the NBS’s urban survey department.

The number of sows able to breed reached 39.5 million in October, up 32 percent from a year ago, while live hogs numbered 387 million, up 27 percent, according to data from the Ministry of Agriculture and Rural Affairs. Hog rearing capacity has recovered to about 88 percent of what it was at the end of 2017. In the mid to long term, the upturn in supply will depress pork prices.

The cold weather may spur food prices to stabilize and rise in future, said Wu Ge, an analyst at Changjiang Securities, adding that holiday demand will also hedge against the pressure of increased pork production capacity as service-related prices, including transport, continue to recover. Taking into account factors such as the base, inflation is expected to see a moderate upturn after the Chinese New Year next year, he added.

The CPI’s annual trend will probably be U-shaped next year, Zheng Houcheng, director of Yingda Securities Research Institute, told Yicai Global, adding that the Purchasing Manager Index for services will very likely remain high after the mass roll-out of Covid-19 vaccines, while the core CPI in 2021 is expected to climb first before dropping on an annual basis.

Producer Prices

China’s Producer Price Index fell 1.5 percent year-on-year in November, but rose 0.5 percent on a monthly basis, according to the NBS.

The PPI’s upward momentum has resumed, Zheshang Securities’ Li said, adding that prices of industrial raw materials generally rose, and higher upstream prices also spurred an increase in downstream demand in November.

Prices of mid-stream industrial products also showed an upward trend, with prices of hot-rolled ribbed steel bars, wires and hot-rolled steel sheets surging. Prices of chemicals products, including glass and cement, did well. Commodities will see big opportunities in the near future with China gradually kicking off a new restocking cycle, and industrial production will hopefully accelerate in the next one or two quarters, Li added.

The annual numerical value of the PPI next year will be higher than in 2020, Zheng said. Against the backdrop of rising international oil and non-ferrous metal prices, including copper, and a corresponding low base, the PPI will rise steadily in the first half of 2021.

Editor: Peter Thomas