China Inflation Slows, Factory Prices in Deflation, Stimulus Hopes Rise


China’s consumer price growth slowed in June while factory prices eased but remained in deflationary territory, raising hopes for stronger economic stimulus efforts at an upcoming Communist Party policy meeting.

Consumer prices increased by 0.2 percent year-on-year in June, according to official data from the National Bureau of Statistics on Wednesday. This marks a decline from the 0.3 percent rise observed in May and falls short of a forecasted 0.4 percent growth predicted by a Bloomberg poll of analysts.

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The producer price index saw a 0.8 percent decline last month year-on-year, an improvement from the 1.4 percent contraction experienced in May. While the factory gate price gauge has shown signs of recovery over the past three months and aligned with analysts’ forecasts, the data highlights ongoing concerns over lukewarm consumer spending in the world’s second-largest economy.

“The risk of deflation has not faded in China,” noted Zhiwei Zhang, chief economist at Pinpoint Asset Management. “Domestic demand remains weak.”

The dip in consumer prices was largely driven by decreasing food costs. Fresh vegetable prices plummeted 7.3 percent year-on-year in June, while fruit prices fell 8.7 percent and beef prices dropped 13.4 percent.

Faltering business confidence has left Beijing heavily dependent on exports and industrial output to propel economic growth. However, this approach is encountering its limits as trade partners, including the EU and the US, are pushing back against the influx of inexpensive goods, accusing China of dumping. Last month, the EU imposed new import tariffs of up to 38 percent on Chinese electric vehicles.

Even developing countries, typically more amenable to trade with Beijing, are responding with their own measures. Several Latin American nations, including Mexico and Brazil, have introduced new levies on Chinese steel products.

This mounting global backlash has prompted policymakers in Beijing to explore alternative methods to support an economy struggling with a prolonged property sector downturn.

Ahead of the Chinese Communist Party’s third plenum, a significant economic policy meeting set for next week, Premier Li Qiang has embarked on a listening tour. He is gathering input from Chinese economists, entrepreneurs, and foreign businesses.

Experts indicate that Beijing’s existing policies have fallen short of stabilizing economic growth. A governmental fund aimed at purchasing unsold housing inventory has not halted the decline in real estate prices, while a “trade-in” program for home appliances and other durable goods has been too restrictive to attract widespread consumer participation.

Leading Chinese economists remain hopeful that President Xi Jinping will announce new policies at the plenum to stimulate domestic demand, potentially including measures to enhance the social safety net as part of his “common prosperity” initiative.

Analysts suggest that anticipated rate cuts by the US Federal Reserve, potentially occurring as soon as September, could enable the People’s Bank of China to further ease monetary policy without adversely impacting the currency.

“We continue to see real interest rates as too high for the current state of the economy and believe the economy would benefit more from rate cuts,” stated Lynn Song, chief China economist at ING.