RBS Royal Bank of Scotland Group PLC

BEIJING—China's long battle with industrial deflation turned a corner last month as a gauge of prices for factory output turned positive for the first time in more than four years.

China's producer price index edged up 0.1% in September from a year ago, the government reported Friday, marking the first time the index was positive in 54 months. The index had fallen by 0.8% in August.

The uptick into positive territory will likely give a boost to profits and operating conditions for hard-pressed manufacturers, whose struggles have weighed on the overall economy. Consumer inflation is also picking up. The consumer price index rose by 1.9% in September, more than expected, from a year earlier, accelerating from a 1.3% gain in August. Economists said the trends herald improved conditions for businesses and the economy.

"This will allow the corporate sector to repair its balance sheet and profitability," said Royal Bank of Scotland PLC economist Harrison Hu. "And it helps corporates control leverage and their debt burden. Deflation is the most dangerous risk for China."

The turnaround in the producer price index came sooner than expected, as it had been generally forecast to arrive in the fourth quarter.

The index, which at its worst registered monthly declines in factory prices of nearly 6% year over year in late 2015, started to rebound at the beginning of this year. A median forecast from 16 economists surveyed by The Wall Street Journal had predicted a 0.2% decline for September.

Fueling the turnaround are stable or rising global commodity prices and efforts by Beijing to cut excess industrial capacity in the steel and coal industries, economists said. Added to the mix are a strongly rebounding property market and continuing infrastructure spending, all of which have helped demand. Profits at large industrial companies rose 19.5% year over year in August, their best showing in nearly two years.

"Since August, prices have been rising after suffering declines in the past," said Zhu Chengliang, a manager of Qimusen Coal Co. in the northern city of Qinyang. He said coal prices had increased by about 300 yuan ($45) a metric ton recently, buoyed by government-ordered production cuts and higher transportation fees. "The government is limiting our mining activity to 270 days a year now. And banks are giving out fewer loans to mine owners than before," he said.

Down the road, rising prices should help companies repay loans with money that has a lower value than when it was borrowed, chipping away at mounting debt loads, economists said. The International Monetary Fund said in April that 15.5% of China's commercial bank loans, equivalent to $1.3 trillion, were held by borrowers without sufficient income to cover their interest payments.

The consumer price index rose largely because of higher prices for energy and vegetables, fruit and other food. Economists said they didn't expect average consumer prices to rise much further in the near future, as the central bank has signaled it wants to rein in risks after flooding the financial system with new credit earlier this year.

As Beijing battles a host of economic problems—from real estate speculation in large cities to weak global demand and a sharp decline in private investment—moderate consumer inflation and an end to producer deflation provide a welcome bright spot, economists said.

"Inflation will likely be a rare area that China's leadership can be fairly relaxed about over coming years," said Capital Economics in a report.

Liyan Qi contributed to this article.

Write to Mark Magnier at mark.magnier@wsj.com

(END) Dow Jones Newswires

October 14, 2016 01:15 ET (05:15 GMT)

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