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China Economy

China factory costs down, inflation eases as economy shows signs of cooling

Producer price index up 5.5 per cent in May from a year ago, while the consumer price index rose 1.5 per cent

PUBLISHED : Friday, 09 June, 2017, 10:28am
UPDATED : Friday, 09 June, 2017, 11:28pm

China’s economy continues to show signs of cooling, with factory gate prices falling for a third straight month in May and inflation hovering at low levels.

The producer price index rose 5.5 per cent in May from a year ago, down from 6.4 per cent in April and lower than the analyst expectation of 5.7 per cent, according to data released by the National Bureau of Statistics on Friday.

The falling PPI was largely attributed to a global decline in commodity prices and the end of industrial restocking at home, as China tried to contain debt and brought in a slew of measures to cool the property market, driving down demand for raw materials.

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“Given the rising base and slowing economy ahead in the second half of 2017, we expect PPI inflation to drop to 0 to 2 per cent towards the end of the year,” said Larry Hu, head of Greater China economics at Macquarie Group. “It also means that corporate earnings growth might have already peaked in the first quarter of this year.”

The consumer price index rose 1.5 per cent last month from a year ago, edging up 0.3 per cent from April, which was largely in line with the market expectation. For the whole year, economists expected CPI to be below 2 per cent.

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Zhou Hao, senior emerging markets economist at Commerzbank, said there was still pressure for the CPI to fall further, given that food prices had been lower over the past few months.

“It means the demand wasn’t strong,” Zhou said. “At least there is pressure in the market to adjust down the expectation for CPI.”

Prices of vegetables, eggs and pork fell significantly last month. At the end of May, the average price of eggs dropped to 4.92 yuan (72 US cents) per kilogram – down 32.5 per cent year on year. The average price of pork fell 23.3 per cent from a year ago, to 20.62 yuan per kilogram.

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The Ministry of Commerce on Thursday said that oversupply had brought down agricultural prices this year. In the first quarter, pork production saw its first positive growth since 2015.

Lu Zhengwei, chief economist of Industrial Bank, said the slow growth of incomes was behind weak demand for food.

Hu meanwhile said China’s moderating PPI and weak CPI cast doubt on the global economic recovery, particularly in emerging markets. “We believe the focus of China’s monetary policy will gradually shift from financial regulation to supporting growth,” he said.