China May consumer inflation eases, factory prices stay soft

The central bank has cut interest rates three times and relaxed banks' reserve requirements twice in six months following a low growth rate of 7%

China's consumer inflation eased in May, while producer prices fell for the 38th straight month, raising concerns about growing deflationary pressures as the economy cools.

Analysts polled by Reuters predicted consumer prices would rise 1.3% compared with 1.5% the prior month.

The producer price index fell 4.6%, the National Bureau of Statistics said on Tuesday, flat against the previous month but missing market expectations for a slide of 4.5%.

Worried about China's economy, where growth cooled to a six-year low of 7% in the first three months of this year, the central bank has cut interest rates three times and relaxed banks' reserve requirements twice in six months.

"The heavy industrial sectors that have led the economy since the early 2000s are mired in excess capacity, and producer price deflation is entrenched," wrote Arthur Kroeber of Gavecal Dragononics in a research note.
 

 

"Clearly the boom times are over, and much more pain lies ahead."

Sliding prices, particularly of commodities, not only put the focus on China's slowing domestic economy but has wider implications for the broader economy and interest rates. While lower costs for energy and steel have helped some producers, it also means the cost of debt is higher in relative terms.

In an environment where returns on investment are seen as usually lower than the nominal 5.1% lending rate for one year - and actual long-term lending rates are generally far higher - company executives say there is little incentive to invest.

That has raised questions whether China might be at risk of following in the footsteps of Japan, where a decade-long fall in consumer prices hurt the economy.

A Reuters poll suggested May indicators will do little to change the broad picture of an economy struggling under the weight of a property downturn, widespread factory overcapacity and local government debt.

China's May exports fell less than expected but a double-digit drop in imports will likely keep the pressure on Beijing for more stimulus to avert a sharper economic slowdown.