Things Are Looking Up for China’s Manufacturers

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Breaking Down China's July Inflation Data

China’s factory-gate deflation eased for the seventh straight month, signaling improving conditions for the nation’s manufacturers and adding to evidence the world’s second largest economy is stabilizing.

Key Points

  • Producer-price index fell 1.7 percent in July from a year earlier, the National Bureau of Statistics said Tuesday 
  • That was the smallest decline in almost two years and compared with economists forecast for a 2 percent drop
  • The consumer-price index rose 1.8 percent, matching estimates

Big Picture

While consumer price gains remain below the government’s target for 3 percent increases, giving the central bank room to further ease policy if it needs to, deflationary pressures have moderated since last year. With China the world’s largest exporter, recovering prices could relieve some deflationary pressures globally if sustained.

Economist Takeaways

The PPI may turn positive by the end of this year, said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. "That is one of the most positive developments of this year," Zhu said. Overall muted inflation "can open the interest-rate cut channel," Zhu said, calling for one reduction in October.

Signs of a recovery in factory prices likely reflects a pickup in prices for commodities such as iron ore rather than signaling that excess capacity has been slashed, said Klaus Baader, chief Asia-Pacific economist at Societe Generale SA. "It is first and foremost a result of less deflation from commodity prices," he said. That means it’ll take a sustained improvement for easing deflation in China to impact the global picture, he said.

The Details

  • Producer price declines moderated in mining, raw materials and manufacturing industries
  • Purchasing price declines moderated to a 2.6 percent drop in July from a year earlier
  • Food prices rose 3.3 percent from a year earlier, non-food prices rose 1.4 percent
  • Flooding pushed up vegetable prices in regions such as Anhui, Hubei, Hebei and Beijing, the NBS said. Anhui saw a surge of 16.2 percent in vegetable prices
  • Consumer prices rose 1.8 percent in urban areas, 1.5 percent in rural
  • The Shanghai Composite Index was little changed

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— With assistance by Xiaoqing Pi

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