China's Aug producer inflation eases, reflecting slowing growth

Beijing

CHINA'S producer inflation cooled in August amid softening domestic demand, pointing to a steady slowing in growth in the world's second biggest economy as it confronts heightened risks to the outlook from a heated trade dispute with the United States.

Consumer inflation, on the other hand, picked up more than expected in August, though policymakers are likely to stay focused on growth rather than pricing pressures as US President Donald Trump raises the stakes in the tariff war.

The producer price index (PPI), a gauge of industrial profitability, rose 4.1 per cent in August from a year earlier, compared with a 4.6 per cent increase in July, according to data released by the National Statistics Bureau on Monday.

Analysts polled by Reuters had expected August PPI to rise to 4 per cent. On a monthly basis, purchasing power parity (PPP) picked up from 0.1 per cent in July to 0.4 per cent in August.

Raw material prices rose 7.8 per cent in August from a year earlier, compared with a 9 per cent increase in July. "Despite soft industrial output in the third quarter, domestic polices such as boosting infrastructure spending could provide some support to prices of related industrial goods in the fourth quarter," said Betty Wang, Hong Kong-based senior China economist at ANZ, noting that month-on-month PPI growth has been picking up.

China's economic growth cooled slightly to 6.7 per cent in the second quarter, though worries about a sharper slowdown have increased in recent months amid rocky trade relations with the United States.

The two countries have already slapped tit-for-tat tariffs on US$50 billion of each other's goods, and Mr Trump has warned that he was ready to slap tariffs on virtually all Chinese imports into the United States.

With domestic and foreign demand slowing, and export orders in both official and private factory surveys extending their declines in August, investors have cause to be nervous about China's outlook.

China's policymakers are trying to keep the economy on an even keel as the dispute with the United States threatens to dent output.

The government has responded by loosening its liquidity tap in money markets and speeding up infrastructure projects as it eyes expansionary fiscal policy to support growth. Beijing has approved new railways in six cities in August.

On a year-on-year basis, the consumer price index (CPI) rose 2.3 per cent in August, fastest pace since February this year and above expectations of 2.2 per cent. It also accelerated from July's 2.1 per cent.

The food price index climbed 1.7 per cent from a year earlier as vegetable prices rose and pork prices rebounded, while non-food prices grew 2.5 per cent in August.

On a month-on-month basis, the CPI increased 0.7 per cent.

Since August, China has reported multiple African swine fever (ASF) outbreaks that have pushed up pork prices in the country's south as demand grows ahead of a week-long holiday in October and also raised the prospect of more imports.

However, analysts said that while ASF has increased the upside risk to the inflation outlook, the impact would most likely be small.

"Improvements in China's disease management and pork's lower CPI weighting these days suggest that any pick-up in inflation this time around would be more moderate," said Chang Liu, a London-based China economist at Capital Economics, in a note last week.

Beijing would be unlikely to respond by raising interest rates even if the disease becomes widespread, Mr Liu said, adding that Chinese officials tend to prioritise economic growth when faced with a combination of slowing momentum and rising inflation.

That view was echoed by Ning Jizhe, the vice-chairman of the state planner, in comments in August that inflation will not present a big problem this year.

China has set an inflation goal of 3 per cent for 2018, same as last year.

The core consumer price index, which strips out volatile food and energy prices, rose 2 per cent in August, compared with 1.9 per cent in July. REUTERS