China Factory-Gate Deflation Eases in New Signal Rebound Endures

  • Producer prices fell 2.6% in June, compared with May’s 2.8%
  • Consumer-price index rose 1.9% after 2% gain month earlier

China Factory-Gate Deflation Eases

China’s factory-gate deflation eased for the sixth straight month, giving policy makers fresh evidence falling prices are turning a corner after more than four years of declines.

The producer-price index fell 2.6 percent in June, compared with a 2.8 percent drop a month earlier, the National Bureau of Statistics said Sunday. The decline was the smallest since late 2014. The consumer-price index rose 1.9 percent from a year earlier, compared with a median economist estimate of 1.8 percent and a 2 percent gain in May.

Factory-gate deflation that has persisted since early 2012, and was at its worst late last year, has been easing amid a rebound in property sales and higher commodities prices. Economists surveyed by Bloomberg project producer prices will turn positive in 2018. That eases pressure on the People’s Bank of China to provide more stimulus to fight deflation, according to Raymond Yeung, an economist at Australia & New Zealand Banking Group Ltd.

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“The negative PPI regime is about to end” and the CPI drop will be temporary as severe flooding boosts food prices, Hong Kong-based Yeung wrote in a report Sunday. “Price levels are generally steady and using monetary easing to mitigate deflationary risk is no longer required. The monetary policy stance of the PBOC will no longer be aggressive.”

Underlying inflationary pressures will continue and there isn’t likely to be a major easing on top of the "current ample liquidity environment," CCB International Holdings economists Serena Zhou and Cui Li wrote in a note Sunday. They said flooding in southern China could spur a rise in fruit and vegetable prices due to transportation disruptions.

The PBOC has kept the benchmark rate at a record low since October. Data due for release on July 15 may show economic growth slowed to 6.6 percent in the second quarter, according to economists in a Bloomberg survey. The expansion in gross domestic product in the first quarter was 6.7 percent, the slowest since early 2009.

While policy makers will be reviewing their stance after the release of quarterly GDP data, easing deflation is doing the central bank’s job for it, Tom Orlik, chief Asia economist at Bloomberg Intelligence in Beijing, wrote in a report Sunday. The PBOC will probably maintain an easing bias but a major addition to stimulus is unlikely, he said.

“Data show factory prices continuing to edge out of deflation,” Orlik wrote. “That’s a positive for corporate profits and credit demand, even as the overall impression of continued subdued prices reflects the weak state of the economy.”

Prices for products leaving factories have fallen by more than 2.6 percent every month since October 2014. PPI declines will narrow through the first quarter of next year and post a 1.5 percent drop in 2017 before rising 0.2 percent in 2018, according to a Bloomberg survey of economists in April.

Food Prices

Producer prices for mining products and raw materials both continued their turnarounds from lows last year. Mining prices fell 8.2 percent from a year earlier, the least in almost two years, while materials prices slumped 6.1 percent.

For a story on the turnaround in factory-gate prices, click here.

Consumer price gains for food slowed to 4.6 percent from a year earlier from 5.9 percent in May. Non-food prices increased 1.2 percent, in line with readings since early last year.

On a month-on-month basis, CPI declined from May as prices of vegetables, fruits and eggs dropped, while gasoline, airline tickets, tourism and medicine were more expensive, the NBS said. Prices for metal and chemical products declined from May, leading to a month-on-month fall in PPI, the agency said.

Consumer-price gains may get a boost from food as extreme weather disrupts supplies of vegetables and other staples. China was already reeling from the worst flooding since 1998 even before Typhoon Nepartak made landfall Saturday in east Fujian Province. Rains have affected two of China’s most industrialized provinces, Jiangsu and Hubei, and taken a toll on some smartphone producers, according to a report by China Daily.

The flooding will boost the CPI in July and August by about 0.2 percentage point to levels above 2 percent, Zhou Jingtong, Beijing-based director of macroeconomic research at Bank of China Ltd., wrote in a note.

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— With assistance by Xiaoqing Pi, and Gary Gao

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