China faces deflation risk

China's inflation remained at zero percent in June, while the producer price index fell sharply, raising concerns about deflation and increasing the likelihood of Beijing launching an economic stimulus package.

China's consumer price index remained flat at 0% in June, the lowest level since February 2021, according to data released by the National Bureau of Statistics.

Core inflation, which excludes food and energy costs, fell to 0.4% from 0.6% the previous month. The producer price index continued its slide, falling 5.4% from a year earlier, more than in May and the steepest decline since December 2015.

“The risk of deflation is looming,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management.

Both measures add to evidence that China’s economic recovery is weakening, with deflation concerns weighing on confidence. That could boost potential stimulus packages seen as a way to prop up the economy.

“The data right now supports more policy easing, which policymakers are doing, but only on a measured basis,” said Michelle Lam, an economist at Societe Generale SA.

Manufacturers have been struggling for months with lower commodity prices and weak demand at home and abroad. If consumers and businesses continue to hold back on spending or investment in the hope that prices will fall, it could lead to a further deflationary spiral.

The main drag on consumer prices last month was pork prices. Prices of the meat — a staple in the Chinese diet — fell 7.2% in June from a year earlier, sharply higher than the 3.2% decline in May.

The Chinese government has tried to put a floor under pork prices to limit the slide, saying last week it would buy more pork for its reserves to boost demand.

Producer price deflation was driven by a prolonged decline in international commodity prices. Oil and coal costs continued to decline, partly due to last year's high base, NBS statistician Dong Lijuan said.

"Consumer prices fell to zero and producer prices fell further in June, suggesting that China's post-pandemic recovery is losing momentum. The declines are a sign of weak demand and also cloud the economic growth outlook," said David Qu, an economist at Bloomberg. "The need for more central bank stimulus is growing."

There have been calls for Beijing to take action to support the economy, but most measures so far have been limited in scope. The central bank cut its benchmark interest rate a small amount last month, and the government has extended tax breaks for electric car buyers.

Premier Li Qiang spoke to some Chinese economists last week about the possibility of more stimulus, although he stressed that policies would be “targeted, comprehensive and well-coordinated” — reinforcing the idea that the stimulus package would not be large-scale. One limiting factor is the high debt burden of local governments, which have traditionally been a growth driver by generating more spending.

Minh Son ( according to Bloomberg )

Source link