China Factory Deflation Eased in June With Recovery on Track
Emissions rise from smokestacks and cooling towers in China. (Photographer: Qilai Shen/Bloomberg)

China Factory Deflation Eased in June With Recovery on Track

China’s factory deflation eased back in June as the economic recovery continued, while consumer inflation ticked up.

The decline in the producer price index narrowed to 3% last month from May’s 3.7%, the National Bureau of Statistics said Thursday. The consumer price index rose 2.5% on year following a 2.4% gain the previous month. The statistics bureau earlier published statements dated 2019 which were then withdrawn.

China Factory Deflation Eased in June With Recovery on Track

The improvement in factory gate deflation indicates the recovery continues to make slow progress, while the rise in consumer inflation is mainly due to a rebound in food prices rather than stronger overall demand. With the outlook for exports grim due to the pandemic raging in other nations, policy makers will continue to face pressure to support the economy.

“The better-than-expected PPI showed that deflationary risks at factory gates might not be so pressing, while the decline in core CPI underscores that the recovery in demand isn’t so ideal,” said Betty Wang, senior economist at Australia & New Zealand Banking Group in Hong Kong. “Going forward, policies will remain supportive, but they’ll likely be more targeted rather than blanket.”

Narrowing PPI deflation in June is because “international commodity prices picked up, domestic manufacturing steadily recovered, and market demand continued to improve,” the NBS said in a statement accompanying the data. Core inflation, which removes the more volatile food and energy prices, slowed to 0.9%.

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The small let-up in “disinflationary pressures” is conducive for more monetary easing, “and with companies still under pressure from the pandemic, we expect the central bank to gradually guide lending rates down.”

David Qu, Bloomberg Economics

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The slowdown in factory deflation may provide support for companies’ profits, which are down more than 19% in the first five months of the year from a year earlier.

A variety of temporary factors pushed up food prices in June, with pork prices rising almost 82% due to slower hog production, strict epidemic prevention requirements and falling imports, the NBS said. Pork is a key element in the country’s CPI basket and wholesale prices began rising again in June.

Serious floods occurred recently in many places in China and a coronavirus cluster in Beijing’s biggest wholesale food market caused a temporary shortage of vegetables in some areas, the NBS said.

China Factory Deflation Eased in June With Recovery on Track

The official gauge of manufacturing activity climbed in June, providing more evidence of a gradual recovery from the historic contraction in the first quarter. The earliest indicators for the economy also pointed in the same direction.

“The floods could increase vegetable prices somewhat but the impact on CPI inflation is likely to be transitory,” said Michelle Lam, greater China economist at Societe Generale SA in Hong Kong. “Headline CPI should moderate to below 2% in the second half” of the year as an improvement in pork supply should lead to a normalization in pork prices, she said.

“For policymakers, the challenge is how to support the recovery of private demand which has lagged so far, and to prevent bubbles, be it in housing, stock market and commodity prices,” she said.

©2020 Bloomberg L.P.

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