China Faltering Demand Proved as Producer Prices Slump

China’s inflation stayed subdued in June while a decline in factory-gate prices extended its longest streak in a decade, underscoring weaker demand in an economy that probably decelerated for a second quarter.

The consumer price index rose 2.7 percent from a year earlier, the National Bureau of Statistics said today in Beijing, compared with a median estimate of 2.5 percent in a Bloomberg News survey and a 2.1 percent gain in May. Producer prices fell 2.7 percent.

The lowest first-half inflation since the financial crisis in 2009 and prolonged factory-gate deflation reflect a slowdown and overcapacity that leave the government at risk of missing its annual growth target for the first time since 1998. Premier Li Keqiang has indicated he’s reluctant to introduce short-term stimulus, instead focusing on spurring longer-term expansion by restructuring the economy and curbing the state’s role.

“Overall, inflation pressure is still quite muted,” said Yao Wei, China economist for Societe Generale SA in Hong Kong, said on Bloomberg Television. “We expect growth to continue to slide over the medium term,” and government efforts to restructure the economy will take time, Yao said.

Estimates for June consumer inflation in a Bloomberg News survey of 40 analysts ranged from 2 percent to 3 percent. The government in March said it would aim to keep price gains to about 3.5 percent this year. The CPI rose 2.4 percent in the first six months of the year.

Stable Prices

Consumer prices in June are “basically stable” if compared with May and the year-on-year increase resulted from a lower base last June, Yu Qiumei, a senior statistician, said in a statement.

Prices of food rose 4.9 percent from a year earlier in June, the statistics bureau said today, after a 3.2 percent gain in May.

The decline in producer prices compares with the median estimate for a 2.6 percent drop in a Bloomberg survey. The index has fallen for 16 straight months, the longest stretch since 2002.

Stocks in China fluctuated after the report. The benchmark Shanghai Composite Index closed 0.4 percent higher, rebounding from a July low yesterday.

China’s economic expansion probably slowed for a second quarter in the three months ended June 30, as export growth weakened and domestic demand slowed. Gross domestic product rose 7.5 percent from a year earlier, according to the median of 31 economist estimates in a Bloomberg News survey ahead of data due July 15. That’s down from 7.7 percent in the first quarter and 7.9 percent in the last three months of 2012.

Cash Squeeze

The government sent interbank borrowing costs to records last month with a cash squeeze that signaled a crackdown on speculative lending.

“The central bank has made it clear that it won’t adopt a relaxed monetary policy,” said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. “On the other hand, modest inflation provides a good chance for the government to liberalize pricing of resources and utilities.”

The General Administration of Customs tomorrow releases June figures on exports and imports, and the central bank will publish data on credit and money supply over the next week. The statistics bureau on July 15 will also provide June numbers on industrial production and retail sales along with first-half fixed-asset investment.

City Borrowing

Ordos, a Chinese city known for its empty skyscrapers, is struggling to repay debt and has resorted to borrowing from companies to pay workers, a magazine published by the official Xinhua News Agency reported July 5. The report adds to signs of strains in the economy, with China Rongsheng Heavy Industries Group Holdings Ltd., the country’s biggest shipyard outside state control, saying last week it’s seeking financial support from the government after orders plunged.

The government is seeking to hold down price gains of consumer items and is investigating drugmakers and food producers. Nestle SA and Danone’s infant-nutrition units said last week they will cut some prices as the National Development and Reform Commission probes the pricing of baby formula.

Aluminum Output

Weakness in demand and expansion in production capacity may squeeze industrial profits. While Aluminum Corp. of China Ltd. said it is suspending production at some plants, others including China Hongqiao Group Ltd., the nation’s largest non-state aluminum producer, are increasing or maintaining output. The Zouping, Shandong province-based company will boost production about 10 percent this year, Christine Wong, head of investor relations, said last week.

“China’s inflationary pressures are muted,” said Liu Li-Gang, Australia & New Zealand Banking Group Ltd.’s head of Greater China economics in Hong Kong, citing an unchanged CPI in June from May. Higher borrowing costs will strain the economy, suggesting that the central bank “will need to cut interest rates to instill confidence,” Liu said in a note.

Before it's here, it's on the Bloomberg Terminal.