China is adding more challenges to the global economy this year, beyond the trade conflict that's rattling financial markets.

[BEIJING] China is adding more challenges to the global economy this year, beyond the trade conflict that's rattling financial markets.

Economists now see the threat of deflation in the manufacturing nation after producer price inflation slowed sharply in December, to the slowest pace since 2016. Nomura Holdings Inc said "the nightmare of PPI deflation is imminent", China International Capital Corp said "deflation pressures are on the rise", and Haitong Securities Co projected the turning point could come as early as this month.

That would not only squeeze corporate profitability at home, but would also put pressure on global price gains, as export prices usually follow those at factory gate. With industrial output and retail sales growth both at the weakest levels in a decade, China's woes would also mean softer demand for imports, hurting other economies.

"China's economic downturn and commodity price falls have led to and will lead to downturns in global economic growth and commodity prices," said Nomura's chief China economist Lu Ting, who sees a 0.1 per cent drop in Chinese producer prices this year.

For Federal Reserve Bank of Boston president Eric Rosengren, it's now worth paying attention to the signals that the Chinese economy is sending.

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"They're dealing with an economy that's slowing down, dealing with possible trade issues that could become very substantial if there's no agreement made, and they have an awful lot of leverage in their economy, which means that the slowdown could be much more than they're anticipating," Mr Rosengren said after a Wednesday speech in Boston.

After raising rates in December, the Fed has signalled it could keep interest rates on hold through March or longer as they wait for clarity on risks to global growth that could affect the U.S. economy.

In South Korea and Taiwan, China's slowdown means weaker demand for electronics, according to Nomura's Mr Lu. For Europe, the weakness would hit sales of luxury goods and German-brand cars, and it could lead to falling prices and demand for commodities from nations such as Australia and Chile, Lu said.

Take cars: Sales of cars in the nation had their first annual drop last year in more than two decades last year as consumers tightened their purse strings due to tighter credit and economic uncertainties. That will add to the recession fears in Germany, which had been betting on an auto industry rebound after an economic contraction and dramatic plunge in industrial activity.

As the headwinds stiffen, Chinese authorities have used a piecemeal policy approach to boost the economy. After a reduction to the amount of cash lenders must hold as reserves early this month, the government announced a three-year package of tax cuts for small and micro-sized businesses - the backbone of the economy - and said that a new targeted funding tool will start this month.

If factory deflation does return, the government will become even more aggressive with such growth-support measures, according to Raymond Yeung and Betty Wang at Australia & New Zealand Banking Group Ltd in Hong Kong.

"If the PPI remains negative for a few consecutive months, the government may consider policy accommodation and property relaxation measures to reduce the risk of a deflationary scenario similar to that during 2012-2016," they wrote.

BLOOMBERG