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China's producer prices fall for first time in 3 years, add to deflation worries

[BEIJING] China's factory gate prices shrank for the first time in three years in July, stoking deflation worries and putting pressure on Beijing to deliver more stimulus as the economy sputters amid an intensifying trade war with the United States.

With demand slowing at home and abroad, Chinese manufacturers are having to cut prices to keep market share, depressing profit margins and discouraging fresh investment needed to get the economy back on its feet.

Falling prices for crude oil, iron ore and other raw materials are also playing a part.

China's producer price index (PPI) fell 0.3 per cent from year earlier in July, the National Bureau of Statistics (NBS) said on Friday.

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That compared with zero growth seen in June and a 0.1 per cent drop expected by analysts in a Reuters poll.

It was the first contraction on an annual basis since August 2016, though the index have now dropped sequentially for the last two months.

"Weak demand has started to impact expectations on the production side," analyst Zou Qiang at Everbright Pramerica Fund Management said in a note.

Mr Zou expects the price contraction to worsen in the coming months due to stricter curbs on the property sector, as regulators try to rein in debt risks.

Producer inflation in other major economies such as the United States and Germany has also been tepid lately, raising questions about the durability of global demand as the year-long US-China trade war looks set to get longer and costlier.

The Chinese industries which saw the steepest factory price declines included oil and gas extraction, and paper and paper product manufacturing, with falls of 8.3 per cent and 7.1 per cent from a year earlier, respectively.

Energy processing firms such as oil refiners and chemical producers also saw extended price declines.

Prices for some major building materials such as steel reinforcing bars were weak in July as high temperatures and rain stalled construction projects.


Friday's data also showed China's consumer inflation picked up to a 17-month high in July, mainly driven by a jump in prices of pork and other proteins due to a prolonged outbreak of African swine fever, and dry weather in fruit-growing regions.

The consumer price index (CPI) rose 2.8 per cent from a year earlier, a touch higher than expectations and June.

Food inflation accelerated at the fastest pace since January 2012. The food price index rose 9.1 per cent on year, picking up from a 8.3 per cent uptick in June. Fruit prices surged 39.1 per cent and pork prices jumped 18.2 per cent.

On a month-on-month basis, CPI grew 0.4 per cent in July after dipping 0.1 per cent in June.

Core consumer inflation - excluding food and fuel - remained modest, however, easing marginally to 1.3 per cent on-year.