Easing measures, reforms expected

Price growth rate is likely to continue declining, heralding more easing measures. Bob Liu, analyst at the China International Capital Corp. (CICC), forecasts December's CPI and PPI growth will slide further.

The risk of deflation in China has risen significantly, Liu said, which would lift the level of real interest rates, further curbing aggregate demand and in turn reinforcing deflation expectations.

"Therefore, counter-cyclical monetary policy easing is strongly needed. The People's Bank of China (PBOC) should cut the RRR and further lower benchmark interest rates," Liu added.

Wang Jun, a research fellow at the China Center for International Economic Exchanges, also expects the CPI to further decline in the next months, saying the macroeconomic policies should be more flexible while maintaining continuity and stability

Increasing deflationary pressure will push up real interest rates and compel more rate cuts, said UBS Chief China Economist Wang Tao, expecting at least two more cuts in benchmark lending rates totaling 50 basis points by the end of 2015.

For RRR cuts, Wang of UBS said, as the market sees it as a strong signal of general monetary easing, the government may want to avoid sending such a signal, opting instead to rely on other facilities to provide liquidity.

The decelerated consumer and producer price growth would also create an opportunity for more price reforms.

Kuang Xianming, director of the research center for economy, China Institute For Reform and Development, said growing deflationary pressure is a major challenge facing China's economy.

However, this would also expand room for key reforms to improve the pricing mechanisms and reduce the financing cost for small businesses, Kuang added.

As part of the price reform, Wang of UBS expected the government to adjust prices of transport, energy and utilities, and adjust resource, energy and environment related taxes.

This would help in "not only reducing price distortions and improving resource allocation, but also cushioning the deflationary pressures," Wang Tao added.