China inflation signals demand falling as prices ease
BEIJING (Reuters) - China's consumer and producer prices eased more than expected in June, inflation data on Monday showed, signaling falling demand for goods from the world's second-biggest economy and the likelihood of more growth-supporting policy moves from Beijing.
China's annual consumer inflation cooled to a 29-month low of 2.2 percent in June versus May's 3.0 percent, data from the National Bureau of Statistics showed, with a month-on-month CPI fall of 0.6 percent twice the rate of decline expected.
Producer prices eased even faster, falling 0.7 percent on the month and 2.1 percent on the year, marking the fourth straight month of outright deflation in factory gate prices and pushing the PPI to a 31-month trough.
"The PPI figure last month further confirmed the economy continued to cool down, which means the industrial output and other economic activity data could not be upbeat," said Wang Jin, a Shanghai-based analyst with Guotai Junan Securities.
China last suffered a bout of deflation between February and October of 2009. By the end of 2009, consumer prices had fallen 0.7 percent on the year.
During that episode annual GDP growth sank to an 8-year low of 6.6 percent in the first three months of 2009 as deflation began to get a grip, with the economy overall seeing its slowest full year of growth since 2002 - albeit at a 9.2 percent clip.
"Inflation is no longer an imminent threat to China. We expect July CPI to fall below 2 percent. August and September will be important months to monitor from an inflation perspective," Dongming Xie, an economist at OCBC Bank in Singapore, said.
"If prices fall too fast, fuelling deflationary expectations, China is likely to cut interest rates further."
Inflation kicks off a week of major economic indicator releases for the Chinese economy, culminating on Friday with the scheduled publication of GDP growth data for the second quarter of the year.
The benchmark Reuters poll forecasts China's economy grew 7.6 percent in the second quarter versus the same three months a year ago. That would mark the slowest quarter of expansion since the three months to March 2009, at the depths of the global financial crisis.
Chinese GDP grew 8.1 percent in Q1 2012 versus Q1 2011.
FALLING PRICES, FALLING DEMAND?
Falling PPI underlines the risk that producer prices are easing not just because of base effects from declining commodity and other input prices versus a year ago, but because final demand for China's factory output - particularly from foreign customers - is declining as the global economy weakens.
The point appears not to be lost on Premier Wen Jiabao who was quoted by the official Xinhua news agency on Sunday as saying more aggressive efforts were needed to support growth - albeit within the "fine-tuning" policy mantra adopted by officials since the autumn of last year.
"China's current economic situation is generally stable, but it still faces relatively huge downward pressure. We should increase the strength of policy fine-tuning," the official Xinhua news agency wrote in an English-language report of Wen's weekend trip to the eastern province of Jiangsu.
In the Chinese language original, the words attributed to Wen were that downward pressures were "relatively big".
Either way, the Premier's message was clearly that more measures will be taken to underpin growth.
"China should maintain its proactive fiscal policy, focusing particularly on improving the structural tax cut policies, while continuing to implement prudent monetary policy to effectively settle the structural contradiction between the supply and demand of credit," Wen said.
In a separate speech at the weekend, however, Wen also reiterated that real estate market curbs - introduced to stifle property speculation that has ramped up home prices well beyond the reach of many middle class Chinese, stoking inflation in the process - would remain in place.
Analysts say relaxing the various restrictions on home purchases would be the fastest, easiest way to reignite growth as property investment represents about 13 percent of economic activity and directly affects about 40 different industries.
The evident easing of inflation pressures gives the price-sensitive Beijing leadership plenty of additional room to tweak monetary and fiscal policy settings to boost the economy.
China's central bank unexpectedly cut benchmark interest rates last week for the second time in a month in a bid to bolster growth. It has also lowered banks' required reserves in three 50 basis point steps since November 2011, freeing an estimated 1.2 trillion yuan ($190 billion) for lending.
China's once-a-decade leadership transition, scheduled for the autumn, further increases the likelihood of action to underpin growth with the government determined to ensure the showpiece event takes place against a backdrop of social stability and economic prosperity, the delivery of which the Communist Party says justifies its one-party rule.
But while the emphasis is clearly on supporting growth, economists are not all convinced that further cuts to benchmark interest rates will materialize.
Zhang Zhiwei, chief China economist at Nomura in Hong Kong, points out that the 0.6 percent month-on-month decline in CPI is not far from the 0.5 percent average monthly June decline seen each year since 2001. Zhang expects no more rate cuts this year.
And with the effect of two interest rate cuts made in the last month still to work their way through the system, it is unlikely that a government so wary of inflation would rush to add to them, according to Andy Ji, an economist and currency strategist at the Commonwealth Bank of Australia in Singapore.
"Given the much delayed monetary transmission from interest rate policy, we believe any rate cuts should take place sooner rather than later," Ji said.
"Thus, we expect no additional reduction to benchmark interest rates, following the two cuts in the past month, although moderating inflation does offer more room for further policy easing if needed."
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