China's factory-gate deflation eases

China's 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

China's factory-gate deflation eased for the sixth straight month, adding to evidence that falling prices have turned a corner after more than four years of declines.

The producer-price index fell 2.6 per cent, compared with a 2.8 per cent drop a month earlier, the National Bureau of Statistics said on Sunday. The decline was the smallest since late 2014. The consumer-price index rose 1.9 per cent from a year earlier, compared with a median economist estimate of 1.8 per cent and a 2 per cent 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 would ease pressure on the People's Bank of China (PBOS) to provide more stimulus to fight deflation, according to Raymond Yeung, an economist at Australia & New Zealand Banking Group Ltd.

"The negative PPI regime is about to end" and the CPI drop will be transitory as severe flooding boosts food prices, Hong Kong-based Yeung wrote in a report on 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."

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 per cent in the second quarter, according to economists in a Bloomberg survey. The expansion in gross domestic product in the first quarter was 6.7 per cent, 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 on 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 per cent every month since October 2014. PPI declines will narrow through the first quarter of next year and post a 1.5 per cent drop in 2017 before rising 0.2 per cent in 2018, according to a Bloomberg survey of economists in April. Producer prices for mining products and raw materials both continued their turnarounds from lows last year. Mining prices fell 8.2 per cent from a year earlier, the least in almost two years, while materials prices slumped 6.1 per cent.

Consumer price gains for food slowed to 4.6 per cent from a year earlier from 5.9 per cent in May. Non-food prices increased 1.2 per cent, 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 in a statement on Sunday.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 on Saturday in east Fujian Province. Rains have affected two of China's most industrialised provinces, Jiangsu and Hubei, and taken a toll on some smartphone producers, according to a report by China Daily.