China's slowing wholesale deflation takes pressure off central bank

EghtesadOnline: China's factory price deflation moderated further in July, with prices falling at their slowest pace in two years, taking pressure off the central bank to cut rates as policymakers turn their focus to structural reforms and ballooning credit.

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09 August 2016

A government-led building spree has increased demand for construction materials, but higher prices are also due in part to speculation in China's commodities futures market, which has pushed up Shanghai rebar futures up by 50 percent this year, according to Reuters.

The producer price index (PPI) fell 1.7 percent in July from a year ago, the National Bureau of Statistics said on Tuesday, smaller than June's 2.6 percent decline. Analysts expect producer price inflation to turn positive this year for the first time in more than four years, but the recovery at the factory gate is unlikely to lead to a rebound in private investment, which has fallen to record low growth rates.

"The improvement of PPI should benefit the corporate sector's profitability, but is unlikely to encourage private sector investment, as the main beneficiaries are heavy industries – which are dominated by state-owned enterprises," said ANZ economists in a note.

Non-ferrous metals prices rose 2.8 percent month-on-month in July, while steel prices increased 0.4 percent.

Downstream prices, however, remained subdued in July with the consumer price inflation accelerating at its weakest pace in six months as food price gains slowed.

The consumer price index (CPI) rose 1.8 percent in July from a year earlier, compared with a 1.9 percent increase in June, and matching this year's low hit in January. Analysts polled by Reuters had expected a 1.8 percent gain.

Consumer inflation has remained well below China's official target of around 3 percent in 2016, despite concerns that severe summer flooding, which has disrupted public infrastructure and agricultural production, would increase inflationary pressures.

Food prices continued to moderate, rising 3.3 percent in July compared with a 4.6 percent gain in June. Prices of pork rose only 16.1 percent versus a 30.1 percent increase in June as demand for the Chinese staple meat continued to cool from peaks hit earlier this year.

Non-food inflation, however, rose 1.4 percent, compared with June's 1.2 percent gain.

Healthcare costs rose 4.3 percent year-on-year in July, up from a 3.8 percent gain in June, which Merchants Securities economist Yan Ling in Shenzhen said reflects a wider improvement in demand for such products.

Similarly, rises in other price categories showed increasing demand for a wider range of consumer goods and services including horticulture, pet care and retirement services, Yan said.

Low inflation means Beijing has room to loosen monetary policy if needed, but policymakers appear to have disparate views over how much stimulus is needed to stoke economic growth, if any, and what form it should take.

However, strengthening producer prices mean there is likely less need to ease in the short-term, analysts say. China's central bank has not adjusted interest rates since October 2015.

"Policymakers are likely to focus their attention on more

pressing issues, such as addressing credit risks and structural imbalances," Julian Evans-Pritchard at Capital Economics said in a note.