China’s soft inflation, grim global outlook point to more stimulus

By Sue-Lin Wong

BEIJING (Reuters) – Soft Chinese inflation and G20 concerns that the global recovery remains grim are hardening views among some economists that more government stimulus will be needed to support China, the world’s second-biggest economy.

Consumer inflation last month remained under the official target of around 3 percent for this year, data released on Sunday showed, indicating persistently weak domestic demand.

The consumer price index (CPI) rose 1.9 percent in June from a year earlier, compared with a 2.0 percent increase in May, China’s National Bureau of Statistics said. Analysts had expected a 1.8 percent gain, a Reuters poll showed.

Against that backdrop of slack price growth, international trade remains weak and the country is plagued by massive overcapacity, particularly in coal and steel, and debt-ridden zombie companies. Externally, China faces a global recovery that its trade minister on Saturday described as “complicated and grim”.

“In our view, while China reiterates the importance of supply-side reform due to debt and overcapacity concerns, the authorities still need to stimulate demand in order to achieve its growth target,” Zhou Hao, senior Asia emerging market economist at Commerzbank in Singapore, said in a note.

The People’s Bank of China (PBOC) last cut interest rates on Oct. 23, the seventh time since late 2014.

China’s leaders have set an economic growth target of 6.5 percent to 7 percent for 2016. The economy expanded 6.9 percent last year, its slowest pace in a quarter of a century.

“Of course, further policy easing is still on the cards, and we hold our view that the PBOC will cut both interest rates and reserve rate requirement this month,” Zhou said.

Other economists say authorities should use fiscal policy to boost growth, adding that question marks remain over the effectiveness of further monetary easing.

A fruit vendor gestures to customers next to signs showing prices of fruits at a market in Beijing, China, May 9, 2016.  REUTERS/Kim Kyung-Hoon/File Photo

A fruit vendor gestures to customers next to signs showing prices of fruits at a market in Beijing, China, May 9, 2016. REUTERS/Kim Kyung-Hoon/File Photo

FOOD & FLOODS

In China, food prices rose 4.6 percent in June, compared with a 5.9 percent gain in the previous month.

Recent flooding in China “is likely to push vegetable and fruit prices higher in the coming months,” ANZ economists Raymond Yeung and Louis Lam wrote in a research note.

Non-food prices inched up 1.2 percent versus May’s 1.1 percent gain.

A top government-backed think tank forecast in late June that consumer prices will likely rise 2 percent for the year, while the long decline in producer prices will ease.

The producer price index (PPI) dropped 2.6 percent in June from a year earlier. Analysts had expected PPI to fall 2.5 percent.

The decline extended a falling streak to 51 consecutive months, though it continued to moderate, suggesting strains on companies’ profits may be easing. The PPI eased 2.8 percent in May.

Producer prices for mining fell 8.2 percent in June from a year earlier, while raw materials dropped 6.1 percent.

GLOBAL ECONOMY

China is due to release its second-quarter gross domestic product (GDP) data on July 15, along with figures for June’s industrial output, investment and retail sales.

Most analysts say GDP growth likely edged lower in the second quarter from 6.7 percent in the first on a year-on-year basis.

To make matters worse, the global economic situation is grim, China’s trade minister Gao Hucheng said on Saturday at the Group of 20 trade ministers meeting in Shanghai, adding that major economies must lead the way in tackling problems including sluggish growth and weak trade.

G20 trade ministers agreed on Sunday to cut trade costs, increase policy coordination and enhance financing.

“The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth,” the ministers said in a joint statement.

“Downside risks and vulnerabilities persist.”

(Additional reporting by Winni Zhou; Editing by Ryan Woo)



Categories: Asia Unhedged, China

Tags: , , , , , ,