Bloomberg News

China PPI Falls at Slowest Pace in Two Years

July 09, 2014

Manufacturing in China

The easing of factory deflation follows reports showing manufacturing expanded at a faster pace last month, indicating that government efforts including speeding up infrastructure spending are helping to defend the economic-growth target for the year of about 7.5 percent. Photographer: Tomohiro Ohsumi/Bloomberg

China’s factory-gate prices fell in June at the slowest pace in more than two years, adding to signs of stabilization in the world’s second-largest economy.

The producer-price index declined 1.1 percent from a year earlier, the National Bureau of Statistics said today in Beijing, compared with the median estimate of analysts for a 1 percent drop. The consumer-price index (SHCOMP) increased 2.3 percent, below projections for a 2.4 percent gain.

The easing of factory deflation follows reports showing manufacturing expanded at a faster pace last month, indicating that government efforts including speeding up infrastructure spending are helping to defend the economic-growth target for the year of about 7.5 percent. Inflation remaining below the official goal of 3.5 percent gives Premier Li Keqiang room for additional stimulus if needed to deal with threats including a property-market slump.

“Deflation is not a threat,” Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong, said in a note. Consumer inflation suggests aggregate demand is still weak and the pace leaves “enough space for additional mini-stimulus measures if they are necessary,” Lu wrote.

China’s benchmark Shanghai Composite Index fell 0.3 percent at the 11:30 a.m. local-time break, while the yuan strengthened 0.1 percent and earlier touched 6.1940, the highest in three months.

Consumer inflation compared with 2.5 percent in May. Food prices rose 3.7 percent in June from a year earlier, contributing 1.21 percentage points to the gain in the broader index, the statistics bureau said after a 4.1 percent increase in May. Non-food inflation was 1.7 percent, the same as May’s pace.

Decline Streak

The drop in producer prices was the smallest since April 2012. It compared with a 1.4 percent decline in May and was the 28th straight, extending the longest streak of declines since a 31-month run from 1997 to 1999. Prices fell 0.2 percent from May, after a 0.1 percent drop the previous month.

“The PPI recovery is in line with expectations as industrial activity is recovering, and commodity prices clearly increased in June,” said Chang Jian, chief China economist at Barclays Plc in Hong Kong. Risks in the economy include the real estate market and the impacts of related defaults and bankruptcies inside and outside the banking industry, she said.

China will release second-quarter gross domestic product data on July 16. The economy probably grew 7.4 percent from a year earlier, the same pace as the previous period, according to the median estimate of analysts in a Bloomberg News survey in June. That projection rose from 7.3 percent in May, as the central government intensified efforts to support growth.

Lending Capacity

The government announced changes last week in the way loan-to-deposit ratios are devised to give banks more lending capacity. That builds on a call from the Ministry of Finance for expedited spending from budgets and reserve-requirement cuts by the People’s Bank of China for lenders that support agriculture and small businesses.

The economy has shown signs of stabilization after what analysts have dubbed a mini-stimulus. Gauges of manufacturing rose to the highest levels this year, according to the Purchasing Managers’ Index (CPMINDX) released by the government, as well as a separate one published by HSBC Holdings Plc and Markit Economics.

Premier Li said July 7 that while China’s economic performance in the second quarter improved from the previous period, the nation can’t lower its guard against downward pressure and will increase the strength of targeted measures. China won’t adopt strong stimulus and can achieve annual goals of economic and social development for 2014, Li said at a press conference with German Chancellor Angela Merkel in Beijing.

PPI inflation is “likely to turn positive towards the end of this year,” Liu Li-Gang and Zhou Hao, China economists at Australia & New Zealand Banking Group Ltd., said in a note today. “Further monetary policy easing will still be needed to help lift confidence in China’s economy.”

China’s customs administration will release June trade figures tomorrow, including exports and imports. The central bank will publish data on June lending and money supply by July 15.

To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at xpi1@bloomberg.net

To contact the editors responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net Scott Lanman, Rina Chandran


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