(Bloomberg) — China’s consumer price index rose less than expected in May and its factory price index fell for the 20th straight month, raising concerns about continued weak demand.
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China’s National Bureau of Statistics said on Wednesday that its consumer price index rose 0.3% from a year earlier, the fourth consecutive month above zero and above the median forecast of 0.4% in a Bloomberg survey of economists.Factory prices further strengthened a deflationary trend that began in the second half of 2022.
With prices still low, there are growing calls for further government action to boost demand.
“Deflationary pressure has not yet subsided,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management, noting that consumer prices fell slightly in May from April. “A more comprehensive and proactive policy stance encompassing the fiscal, monetary and real estate sectors may be needed to more effectively boost domestic demand.”
Core inflation, which excludes volatile food and energy prices, rose 0.6%. The producer price index fell 1.4% year-on-year in May after falling 2.5% in April, mainly due to higher commodity prices.
The government has struggled to boost household spending amid a lingering property and labor market slump, which led to the country’s longest period of deflation since the global financial crisis in January. Falling producer prices are squeezing corporate profits and discouraging investment. There is also a risk that consumers will be more hesitant to spend in the future in anticipation of cheaper goods.
Hong Kong’s stock market benchmark CSI 300 index closed little changed on Wednesday, but Chinese stocks in Hong Kong were down 1.4% as of 3:48 p.m. local time.
Bloomberg Economics’ take…
“Another month of weak consumer price data is a clear indication that further stimulus is needed to boost domestic demand in China. We expect some relief to come as the People’s Bank of China is expected to begin cutting interest rates for 2024 on June 17, cutting its key interest rate by 10 basis points.”
— David Ku, Economist
Read the full report here.
Industrial companies have long struggled with slowing profit growth amid growing foreign government frustration over excess capacity in Chinese manufacturing and intensifying price wars in areas such as battery production and electric vehicles.
Raymond Yeung, chief Greater China economist at Australia & New Zealand Banking Group Inc., said potential steps by the Chinese government to curb excess capacity in response to concerns “could help ease producer price deflation.”
“However, in our view, the key to addressing downward price pressures is a recovery in domestic demand. A low inflation regime appears to be the norm as real estate issues remain stubbornly weak,” he said.
Economists surveyed by Bloomberg expect consumer price inflation to rise 0.7% this year, far from the official target of 3%.
China last month unveiled a wide-ranging real estate rescue package that includes easing mortgage rules and encouraging local governments to buy up unsold homes in an effort to tackle China’s economy’s biggest real estate problem. But limited financial support from the central bank and apparently slow progress on pilot programs in some cities have investors and analysts skeptical the measures will go far enough.
China’s consumer support has been focused on automobiles, as the government rolled out a program in April to encourage businesses and households to upgrade old machinery with government subsidies in a major effort to stimulate consumption. The finance ministry said earlier this month that total subsidies for car trade-ins would exceed 11 billion yuan ($1.5 billion) this year.
“We expect the upcoming implementation of the trade-in exchange scheme will have a positive impact on demand by households and businesses and spur some demand-led inflation,” Kelvin Lam, an economist at Pantheon Macroeconomics, wrote in a note.
However, Hayashi said a strong recovery in domestic demand would require addressing the “current economic downturn,” including real estate problems and rising local debt.
“We expect further structural reforms to be announced at the Third Plenary Session in July, as well as additional stimulus measures,” he said, continuing to call for the central bank to cut interest rates on its key one-year loans to lenders by 10 basis points this month.
–With assistance from Zhu Lin.
(Updated with analyst comments and closing stock price.)
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