July 9, 2015 / 2:07 AM / 4 years ago

China June inflation edges up, producer deflation stays entrenched

BEIJING (Reuters) - China’s consumer inflation edged up slightly in June while stubbornly weak producer prices fell again, data that could increase worries about a sluggish Chinese economy which is also smarting from a stock market rout.

China’s consumer inflation quickened to 1.4 percent year-on-year in June, beating market expectations.

Analysts polled by Reuters predicted the index would come in at 1.3 percent, compared with 1.2 percent posted for May.

The producer price index cooled to -4.8 percent in June, the National Bureau of Statistics said on Thursday. This marks its 39th straight month of declines.

The market had expected producer prices to fall 4.5 percent on an annual basis after a decline of 4.6 percent the prior month.

Kevin Lai of Daiwa Capital Markets in Hong Kong said that given what’s going on in the markets, “there must be pressure on the central bank to ease to counter deflation pressure. There must be a lot of negative wealth effect from the stock market, which is deflationary. That means in the next few months we may see further downward pressure on CPI.”

Li Huiyong, economist at Shenyin & Wanguo Securities in Shanghai, said inflation was still at a low level

“The data continues to point out the weak domestic demand in the real economy. Given the stabilizing of consumer prices, we think there are still room for the central bank to ease its monetary policy,” Li said. “They are more likely to cut the amount of cash that banks must hold as reserves in the coming months.”

China’s anemic economy has had a difficult year. A steady stream of policy-loosening steps has not revived activity. Worse, a swooning Chinese stock market that has plunged nearly one-third in the past month, wiping out around $4 trillion so far, has further rattled confidence.

To calm panicky investors, China has in the past week launched a rescue plan for plunging share prices that includes halting initial public offerings and ordering Chinese brokerages and fund managers to buy at least 120 billion yuan ($19.3 billion) of stocks.

But the measures have yet to calm the stock market, which shed 7 percent on Wednesday.

To support the economy, China’s central bank cut its lending rates for the fourth time in seven months in June, and lowered the amount of cash that some banks must keep as reserves.

But the easier supply of credit has not visibly boosted China’s real economy as firms that need the money the most, such as small businesses, are still encumbered by prohibitively costly bank loans.

A woman, wearing a face mask to block the sun's rays, buy vegetables at market stall in Beijing, China, July 9, 2015. REUTERS/Kim Kyung-Hoon

Most analysts believe China could lower rates yet again, alongside further reductions to the reserve requirement ratio to ensure the economy grows by around 7 percent for the full year, as targeted by the government.

The government is due to release second-quarter gross domestic product data on July 15 and many economists expect growth to dip below 7 percent, which would be the weakest performance since the global financial crisis.

(This story corrects stock capitalisation wiped out to around $4 trillion, not $550 billion)

Reporting by Winni Zhou and Pete Sweeney; Editing by Richard Borsuk

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