BEIJING (REUTERS) – China’s factory-gate prices shrank at the sharpest pace in three years in August, falling deeper into deflationary territory and reinforcing 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 salvage new orders or cut output to contain costs, chipping away at already-lean profits and further dampening business confidence.

The fall was mainly driven by weakness in raw material prices.

China’s producer price index (PPI) dropped 0.8 per cent from a year earlier in August, widening from a 0.3 per cent decline seen in July and the worst year-on-year contraction since August 2016, National Bureau of Statistics (NBS) data showed on Tuesday (Sept 10).

Analysts polled by Reuters had expected the index to have shrunk by 0.9 per cent.

“With demand-side pressures on prices increasingly subdued, we think that further monetary easing is on the horizon,” Capital Economics said in a note to clients, predicting producer deflation will get worse in coming months.

Share prices in Shanghai fell as the data pointed to growing profit pressure.

China’s central bank on Friday cut banks’ reserve requirements for the seventh time since early 2018 to free up more money for lending, and analysts widely expect it to cut some of its key lending rates next week to reduce corporate borrowing costs. Economic growth has cooled to near 30-year lows.

Surging food prices will not be a barrier to policy easing, Capital Economics said.

China’s food price index in August rose 10 per cent on-year, up from a 9.1 per cent jump in July and the highest since January 2012. Pork prices soared 46.7 per cent, after an increase of 27 per cent in July, as swine fever decimates the country’s herds.

The consumer price index (CPI) rose 2.8 per cent from a year earlier, unchanged from July and beating analysts’ expectations at 2.6 per cent.

On a month-on-month basis, CPI grew 0.7 per cent following a 0.4 per cent uptick in July.

Core consumer inflation, which excludes food and fuel, picked up to 1.5 per cent on-year after a 1.3 per cent gain in the prior month.

FACTORY DEFLATION EXTENDS TO SECOND MONTH

Weakness in producer prices were also seen recently in other major economies including the United States, Canada and the euro zone, raising concerns over demand worldwide as the Sino-US trade dispute upends global supply chains.

China’s oil and gas extraction industries saw the greatest deflationary pressure in August, notching up price declines of 9.1 per cent on year, according to official results. The oil, coal and other fuel processing industries also saw price deflation worsening to 5.9 per cent in August.

Demand for major building materials faltered in August and manufacturing activity contracted more steeply than expected, while the central government remained reluctant to ease curbs on the property industry, a major growth driver, as it tries to keep home price rises in check.

Spot prices for steel reinforcing bars continued to hover below the level seen in the same period last year, worsened by a seasonal slackening in construction activities during summer.

Imports of unwrought copper, another cornerstone material in construction and a key gauge of demand, also sank in August.