China CPI Hints at Demand Pick Up That Stocks Rout Threatens

China’s consumer prices rose faster than economists forecast in June, suggesting a stabilization in demand that’s now threatened by the stock market’s rout.

The nation’s consumer-price index increased 1.4 percent last month from a year earlier, compared with the 1.3 percent median estimate in a Bloomberg survey and the 1.2 percent increase in May. The producer-price index fell 4.8 percent, extending declines of more than three years.

After cutting interest rates four times since November, the People’s Bank of China said Wednesday it will provide ample liquidity to support the stock market as it joins other arms of the government to stem the sell off. The inflation rate is about half the government’s annual target, giving room for further monetary easing, as forecast by economists.

“As deflation risk remains elevated and market sentiment deteriorated sharply amid the stock market slump, China’s monetary and fiscal policies will have to become more supportive,” said Liu Li-Gang, chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong.

The best policy option is a cut to banks’ required reserve ratios, which would send a signal to the equity market that liquidity is plentiful and help to lower money market and bank lending rates, he said. “We believe such a policy action could be imminent,” Liu wrote.

The Shanghai Composite Index rebounded as the government ratcheted up measures to stem a bear market rout. The index rose 0.3 percent at 10:42 a.m., erasing a loss of as much as 3.8 percent.

Food Inflation

Food inflation increased to 1.9 percent, while non-food prices climbed 1.2 percent from a year earlier, the data showed. Consumer prices were unchanged from a month earlier.

“Consumer prices signal stronger demand,” said Zhu Qibing, an analyst at China Minzu Securities Co. “But the figure is still lingering at a low level. The central bank doesn’t need to worry about inflation for now.”

That’s a relief for the People’s Bank of China, which has joined other government bodies in the effort to halt a month-long slide in stocks that threatens to derail signs of economic stabilization. China’s central bank will provide “ample liquidity” to aid the nation’s plunging stock market, it said in a statement on its website Wednesday.

“The People’s Bank of China has already ratcheted up its easing efforts,” Bloomberg’s Chief Asia Economist Tom Orlik wrote in a note. “With market turbulence reinforcing the argument for further easing, we continue to expect a further rate cut by the end of the year.”

— With assistance by Xiaoqing Pi

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