China was left on the verge of consumer deflation in a new sign of weakness for its economy

Port of Shanghai (Reuters) (ALY SONG /)

The production prices of China they fell in June to their fastest pace in over seven yearswhile consumer prices were reeling on the verge of deflationwhich reinforces the arguments in favor of economic leaders applying more stimuli to reactivate the slow demand.

The worsening of factory price deflation and the move of consumer prices towards deflation for the first time since February 2021 are Negative signs for China’s economic growth.

The momentum of China’s post-pandemic recovery has slowed from the strong rebound seen in the first quarter, with a weakening demand for industrial and consumer productsraising concerns about the health of the world’s second-largest economy.

“We believe the more challenging deflationary environment and the sharp slowdown in growth momentum support our view that the People’s Bank of China has entered a rate-cutting cycle,” Barclays economists said in a research note.

The producer price index (PPI) fell for the ninth consecutive month in June, down 5.4% from a year earlier, the National Statistics Office reported on Monday, the steepest decline since December 2015. This figure contrasts with the decrease of 4.6% of the previous month and with the fall of 5.0% predicted in a survey of Reuters between analysts.

The yuan falls after the economic results (Reuters)
The yuan falls after the economic results (Reuters) (Kim Kyung Hoon /)

The consumer price index (CPI) was flat year-on-year, compared with the 0.2% increase seen in May, driven by a faster fall in pork prices. This frustrated expectations of a 0.2% rise and marked the slowest pace since February 2021.

Nomura expects consumer prices to fall 0.5% year-on-year in Julyeven taking into account a possible increase in service inflation as a result of the summer holiday season.

Are Weaker-than-expected inflation readings hit financial marketswith the yuan down and Asian stock markets plunging into the red.

“We expect headline inflation to be around 1% by the end of the year. However, inflation will remain low and will not constrain the People’s Bank of China’s ability to further ease its monetary policy,” said economists at Capital Economics.

“Having said that, Given weak demand for credit and pressure on the currency, we believe the bulk of support will come from fiscal policy. We expect just another 10 basis points of interest rate cuts this year.”

Beijing has set a target for average consumer inflation in 2023 of around 3%. Prices rose 2% year-on-year in 2022.

China last month cut policy rates to boost liquidity and vowed to take steps to boost household consumption.

As for producer prices, the largest year-on-year falls were observed in energy, metals and chemical products, as internal and external demand weakened.

“The acceleration of the decline in the producer price index reflects the still weakness in the real estate and construction sectors, as well as the strength of industrial production,” said Bruce Pang, chief economist at Jones Lang Lasalle.

“However, the year-on-year decline in the producer price index is likely to have bottomed out and is expected to ease gradually in the second half of the yearPang said.

Hu Yuexiao, an analyst at Shanghai Securities, says the Chinese central bank is likely to cut interest rates further and expects reserve requirement ratio and interest rate cuts in the second half.

However, economists say the small rate cuts will not have a big impact on loan demand as households and businesses repair COVID-19 damaged balance sheets and repay debts, forcing Beijing to resort to fiscal stimulus and other means to stimulate demand.

(With information from Reuters/By Liangping Gao, Ella Cao and Ryan Woo)

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