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The producer price index (PPI), the price charged to buyers from producers at the factory gates, is teetering on the brink of deflation. Photo: Xinhua

China economy feels the strain as consumer prices soar and producer prices plummet to the brink of deflation

  • The consumer price index (CPI) stayed at 2.7 per cent in June, the same as in May, which was itself the highest reading for 15 months
  • Producer price index (PPI), the price charged to buyers at the factory gates, fell to the brink of deflation at 0.0 per cent in June

China’s inflation figures revealed two separate headaches for Beijing on Wednesday, with consumer prices continuing to rise, while the prices producers charged at factory gates in June threatened to dip into deflation.

The consumer price index (CPI) stayed at 2.7 per cent, the same as in May, which was the highest reading for 15 months. This indicates that prices are continuing to rise for Chinese consumers at a time when the economy is battling serious headwinds on a number of different fronts.

Meanwhile, the producer price index (PPI), the price charged to buyers from producers at the factory gates, is teetering on the brink of deflation, reporting at 0.0 per cent in June year on year, down from 0.6 per cent in May and below a Bloomberg poll, the median forecast of which was 0.1 per cent.

Domestic consumption has been a concern of policymakers in Beijing for some time, and the fact that prices are rising, it will add to this anxiety since it makes it more difficult for consumers to buy more.

The consumer price index stayed at 2.7 per cent indicating that prices are continuing to rise for Chinese consumers. Photo: Reuters
However, the PPI number provides an additional problem, suggesting that the country’s manufacturers are unable to receive the prices they want for their goods. This was reflected in the fact that on Monday it was announced that car sales had risen for the first time since May 2018. However, it came with the caveat that dealers offered discounts of up to 50 per cent to clear inventory before the implementation of new emissions rules.

PPI has not been negative since August 2016, when it had remained below 0.0 for 54 consecutive months from March 2012.

Sluggish PPI is indicative of a slowdown in China’s industrial economy. Industrial production grew by 5.0 per cent in May from a year earlier, down from 5.4 per cent in April, to the lowest reading since 2002.

The official manufacturing purchasing managers’ index (PMI) – a gauge of sentiment among factory operators – remained weak in June, unchanged from May at 49.4, marginally below the mean forecast of 49.5 in a poll of economists by Bloomberg.

Pork prices in June rose by 21.1 per cent. Photo: AP

The National Bureau of Statistics (NBS) implied that producer prices fell in June largely because of the energy sectors, with oil, coal and other fuel processing industries falling by 1.9 per cent, with oil and gas extraction down 1.8 per cent.

In a note earlier this week, Asia-Pacific economist Carlos Casanova from trade credit insurer Coface had warned that PPI would slow, due to “a combination of weaker oil prices in June as well as a contraction in the manufacturing sector, as proxied by industrial production figures and contractionary purchasing managers’ indices.”

Another severe headwind facing the Chinese economy is the African swine fever outbreak. June’s CPI showed that food prices rose 8.3 per cent, with pork prices rising by 21.1 per cent. This was 2.9 percentage points higher than in May.

The NBS statement said that “the supply of pork is tight” and also drew attention to the price of fresh fruit which rose by 42.7 per cent, an increase of 16.0 percentage points from May.

But it is African swine fever and the rise of pork prices which will be the biggest cause for anxiety, among the basket of consumer goods used to calculate CPI, since pork is thought to be the single-largest element.

China is the world’s largest pork market, consuming around half the global total annually, meaning that a spike in pork prices affects the average consumer disproportionately.

At a press conference in Beijing last week, Xin Guochang, executive officer at the Ministry of Agriculture, said that there could be a 10 to 15 per cent drop in pork production in 2019 due to African swine fever. Others expect a much higher drop, with a report from Rabobank in April estimating that up to 200 million pigs were affected by the virus, which could cut pork production by 30 per cent.

The government has tried to maintain that the African swine fever outbreak is under control, claiming that there were only 44 new cases over the first six months of 2019, bringing the total number of reported cases so far to 143, with 1.16 million pigs culled.

However, a report by Chinese business publication Caixin on Friday claimed that local governments have been ignoring attempts to report the suspected outbreaks by pig breeders around China because they “couldn’t afford to pay the required compensation to the owners of culled pigs”.

Caixin reported that other local officials felt they would be punished for reporting cases while under pressure from the central government in Beijing to eradicate the disease.

“Looking ahead, the latest stabilisation in consumer price inflation is likely to prove short-lived. The drag from falling oil prices should ease before long and the recent collapse in pig supply suggests that upward pressure on food prices is likely to intensify in the coming months. However, given that supply disruptions will be mostly to blame, we don’t think that a further rise in headline inflation will prevent the People’s Bank of China from loosening monetary policy,” read a note from Capital Economics.

Further details on China’s economy will be revealed later this week with the release of official trade data by the NBS on Friday. These are expected to be negative, since within June’s PMI survey, manufacturers were increasingly pessimistic about new export orders, which slipped further into contractionary territory.

China’s gross domestic product growth for the second quarter will also be released on Monday. This will be arguably the best indicator as to how deeply the trade war with the United States has affected China’s economy, and how successful Beijing’s attempts to stimulate the it have been.

This article appeared in the South China Morning Post print edition as: Double whammy for Beijing with inflation figures
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