China deflation risks grow, foreign central banks on alert

Thu Sep 10, 2015 8:11am EDT
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By Pete Sweeney and Charlotte Greenfield

BEIJING/WELLINGTON (Reuters) - The risk of deflation in China is growing, data suggested on Wednesday, as policymakers tried to reassure markets that the economy can stay on track and state banks were suspected of intervening in offshore markets to bolster the yuan.

Some foreign central banks are increasingly worried about the impact falling Chinese prices and a weaker yuan CNY=CFXS could have on their economies, following a surprise devaluation in the currency last month.

Since then investors have been betting the yuan, or renminbi, could fall further, reflected in a wide spread between the offshore and more-tightly controlled onshore rates.

On Wednesday afternoon though a surge of buying sent the offshore rate up more than 1 percent, in what market sources said was a move by Chinese state-owned banks to curb speculation against their currency.

Sliding Chinese stock prices and currency have rattled global markets and prompted a flurry of policies and intervention by authorities to steady the world's second-biggest economy.

Earlier, New Zealand's central bank governor Graeme Wheeler said the yuan devaluation had left them concerned about the risk China may let it slide further.

"We've seen authorities basically say they want to stabilize the renminbi, but if there were to be a very substantial depreciation in the renminbi it would certainly export deflation around the rest of the world, so everybody is looking closely at China," he said at a press briefing following an interest rate cut in New Zealand.

The deflation threat was underlined by data showing that Chinese manufacturers cut prices at their fastest rate in six years, with the producer price index (PPI) down 5.9 percent in August from a year earlier, though consumer prices are rising for now.   Continued...

A customer pushes a cart at a supermarket in Fuyang, Anhui province, August 9, 2015. REUTERS/Stringer/Files