China: Risk Of Deflation Prompt Stimulus Measures
Consumer prices in China hit the highest level this year while deflation risks in industrial production loomed larger, signaling a need for continued easing policies.
The National Bureau of Statistics (NBS) announced on Thursday that China’s consumer price index (CPI), the main gauge of inflation, climbed to 2% in August, the highest mark in Y 2015.
The figure was up from a predicted 1.9% and the 1.6% recorded in July. On a monthly basis, the CPI rose 0.5% in August, according to the NBS.
NBS statistician Yu Qiumei attributed the pick-up to higher food prices, including vegetables and pork.
The price of China’s favorite meat is one of the most important factors the NBS considers when formulating the CPI. Pork prices climbed sharply by 19.6 percent year on year in August.
Since 2015, pork prices have risen as a result of a decline in pig breeding. Low prices last year and rising feed prices have left farmers less willing to raise pigs.
Pork prices surged more than 20% between 20 March and 17 July this year, according to data provided by the Ministry of Commerce.
Non-food inflation remained subdued at 1.1% in August, unchanged from July.
Zhu Baoliang, an economist with the State Information Center, a government think tank, said favorable factors remain to keep inflation under control, including an expanding service industry and a government determined to deliver on its reform promises.
He predicted the inflation rate in the second half of the year will not exceed 2%. The Chinese government aims to keep consumer inflation at around 3% for Y 2015.
The producer price index (PPI), a measure of costs for goods at the factory gate, fell 5.9% Y-Y in August, widening from the 5.4% drop seen a month earlier, NBS data showed.
The August reading slumped to its lowest level since the end of Y 2009, marking a 42nd straight month of decline.
For the first eight months, PPI averaged a 4.9% Y-Y fall. On a monthly basis, the index fell 0.8% in August.
NBS statistician Yu Qiumei attributed the PPI contraction mainly to dropping prices of industrial products and decreasing costs for Crude Oil and Nat Gas production.
“Domestic demand remained sluggish, and commodity prices were on the decline. China still faces grim deflation risk and more easing polices are needed,” noted Qu Hongbin, chief China economist at HSBC.
A combination of deflation risks and a slowing economy has troubled China as it tries to re-tool its economy for slower but more sustainable growth based on more sophisticated industries.
Foreign trade in August dropped 9.7% Y-Y to CNY 2.04-T (US$320.8-B). Exports fell 6.1% Y-Y to CNY 1.2-T while imports slumped 14.3% to CNY836.1-B, official data showed Tuesday.
Facing lingering downward risks, authorities have ramped up efforts to prop up the economy.
China has cut the RRR (reserve requirement ratio) of banks four times in nearly 7 months and cut interest rates 5 times in nearly 9 months.
China’s banking and housing regulators slashed payment requirements for 2nd home purchases using housing provident funds to 20% from 30% at the end of August, provided the buyers have paid off the mortgages on their 1st home, to step up recovery of the property sector.
Tuesday, the Ministry of Finance released fresh fiscal stimulus policies to stabilize growth, such as coordinating funds to accelerate project construction, activating idle money and widening tax breaks.
Liu Ligang, chief economist for the Greater China Region of ANZ Bank, said further policy easing is needed to stave off the risk of a vicious cycle of slower growth and deflation.
He said he expects the central bank to cut the RRR by another 50 bpts by the end of the year.
By Tian Shaohui
Paul Ebeling, Editor
HeffX-LTN
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