China Factory Prices Drop as Consumer Gains Hand PBOC Headache

(Bloomberg) -- China’s producer price index fell for the first time in nearly three years while consumer price growth accelerated, complicating the People’s Bank of China’s efforts to support the economy.

Factory prices fell 0.3% in July from a year earlier, a bigger decline than the median estimate of -0.1% by economists. The consumer price index rose 2.8% year-on-year, faster than forecast, according to data released by the National Bureau of Statistics on Friday.

Faster consumer price gains coupled with falling producer prices makes it tough for the People’s Bank of China to respond via monetary policy, as cuts to the cost of borrowing risk pushing headline consumer inflation beyond the government’s preferred 3% limit. That may mean policy makers choose to stick with their current strategy of targeted easing measures, for now.

“We see room to lower financing costs further for the corporate sector,” said Ding Shuang, chief China and North Asia economist at Standard Chartered Bank Ltd. in Hong Kong. “However, a benchmark lending rate cut is unlikely given the elevated headline CPI inflation driven by pork prices.”

Prices of fresh fruit jumped 39.1% from a year ago while pork prices increased 27%, the two combined pushing up CPI by 1.22 percentage points, according to the NBS statement.

What Bloomberg’s Economists Say

The drop in China’s producer prices signals the industrial sector is slipping back into deflation. This damps enterprises’ profits, especially in upstream businesses, and adds more pressure on the People’s Bank of China to cut interest rates.
-- David Qu and Qian Wan, Bloomberg Economics
For the full note click here

At the same time, core inflation, which excludes food and energy, was steady at 1.6%, signaling that inflation pressures are not becoming broad-based at the moment. The outlook for China’s economy is dimming along with the chances for a quick resolution to the trade war with the U.S.

President Donald Trump announced last week that the U.S. will impose 10% additional tariffs on another $300 billion worth of Chinese exports starting next month, after the two sides ended their first face-to-face talks in three months without progress. Beijing said it will retaliate.

Export data from July released Thursday had shown some improvement, but sentiment among manufacturing purchasing managers was still negative last month. The addition of fresh tariffs adds to the uncertainty.

“The weak PPI number showed that manufacturing demand has been subdued, due to trade frictions with the U.S. and also slowing domestic economy," said Liu Xuezhi, an economist with Bank of Communications in Shanghai. “Whether the PBOC will follow the global trend of easing would still depend on how the CPI goes in the coming quarters. Non-food CPI actually declined a bit on a monthly basis, so it is still possible that the consumer goods inflation can come down."

--With assistance from Kevin Hamlin.

To contact Bloomberg News staff for this story: Yinan Zhao in Beijing at yzhao300@bloomberg.net;Sheryl Tian Tong Lee in Hong Kong at slee1905@bloomberg.net;Miao Han in Beijing at mhan22@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, Sharon Chen

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With assistance from Bloomberg