China slides to brink of deflation, adds urgency for economic stimulus

By Bloomberg News
 

China’s consumer inflation rate was flat in June while factory-gate prices fell further, fueling concerns about deflation risks and adding to speculation about potential economic stimulus.
 

The consumer price index was unchanged last month from a year earlier — the weakest rate since prices fell in February 2021, according to data released by the National Bureau of Statistics on Monday. 

Core inflation, which excludes volatile food and energy costs, slowed to 0.4% from 0.6%. Producer prices fell 5.4% from a year earlier, faster than May’s drop and the deepest pace since December 2015. 

“The risk of deflation is very real,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd.

Both gauges add to evidence that the recovery is weakening, with concerns about deflation weighing on confidence. That’s likely to spur more speculation about what potential stimulus may be on the cards to shore up the economy.

“Today’s data certainly argues for more policy easing, which policymakers are already doing, but only in a measured manner,” said Michelle Lam, Greater China economist at Societe Generale SA. 

Producers have already spent months contending with lower commodity prices and weak demand at home and abroad. If consumers and businesses continue to hold back from spending or investment in the hopes of prices getting lower that could lead to a self-fulfilling price dropping spiral.

The Hang Seng China Enterprises Index advanced as much as 2.4% on Monday, driven by tech stocks as investors look for normalization in the nation’s regulatory environment. 

The CSI 300 gauge of mainland shares rose as much as 1%, following three weeks of drops. The offshore yuan erased gains of as much as 0.2% after the inflation data.

A key drag on consumer prices last month was pork prices. The cost of meat — a staple in the Chinese diet — fell 7.2% in June from a year earlier. That was more than May’s 3.2% decrease. 

The government has been trying to put a floor under pork price declines, saying last week that it would buy more pork for state reserves to boost demand.  

The producer price deflation was fueled by extended drops in international commodity prices. In a statement, NBS statistician Dong Lijuan cited a continued fall in the costs of oil and coal, as well as a high base of comparison with last year. 

What Bloomberg Economics Says ... 
 

“Zero consumer price inflation and deeper falls in producer prices in June suggest China’s post-covid rebound has lost more steam. Flagging momentum on the price front is a sign of weak demand that clouds the growth outlook. The need for more stimulus from the People’s Bank of China is rising.”

— David Qu, economist

Despite more calls for Beijing to take action to support the economy, most measures so far have been limited in scope. The central bank cut a key policy interest rate last month by a small amount, and the government has extended tax breaks for buyers of electric cars. 

Premier Li Qiang spoke last week with some Chinese economists about potential aid, though he emphasized that policies would be “targeted, comprehensive and well-coordinated” — reinforcing expectations that stimulus would not be massive in size. One limiting factor: The high debt burden held by local governments, which have traditionally been responsible for driving growth via more spending.