China factory deflation eases but not enough to call turnaround
Frail domestic demand will be an obstacle to a government effort to reverse deflation
[BEIJING] China’s factory deflation eased for the first time in six months, even as consumer prices slipped below zero again, leaving open the question of whether the government will make a lasting difference with its campaign to ease overcapacity across the economy.
The producer-price index decreased 2.9 per cent in August from a year earlier, the National Bureau of Statistics (NBS) said on Wednesday (Sep 10), remaining in negative territory for the 35th straight month but narrowing its decline from July’s 3.6 per cent drop.
In month-on-month terms, output prices in some upstream sectors, such as the mining and processing of metals, rose for the first time in months.
But deepening food deflation meant the consumer price index (CPI) turned negative for the first time in three months, with a drop of 0.4 per cent in August from a year earlier. That was worse than every forecast in a Bloomberg survey of economists surveyed, whose median estimate was minus 0.2 per cent.
Market reaction to the data was muted. China’s 30-year government bond yield was little changed at around 2.2 per cent, while the yuan was steady against the US dollar.
China is in its third straight year of deflation for the first time since it started to transition away from central planning in the late 1970s. Nine straight quarters of economy-wide price declines reflect a mismatch between supply and demand, weighing on the balance sheets of companies and pushing down the earnings of both households and the government.
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A drop in food prices and the effect of a high base from last year were the main cause of the CPI decline in August, according to Dong Lijuan, chief statistician at the NBS.
Food costs declined 4.3 per cent year on year, with the cost of fresh vegetables plunging over 15 per cent, the most since November 2022.
But core CPI, which excludes volatile items such as food and energy, rose to an 18-month high of 0.9 per cent. Dong said that its increase shows policies to boost demand and consumption are taking effect.
The decline in China’s August consumer price growth “was entirely due to food”, said Michelle Lam, Greater China economist at Societe Generale.
“The CPI outlook is still fragile given easing house prices and the diminishing impact of government subsidies,” she said, adding “the pick-up in core CPI was weaker than what we have expected”.
Whether consumer and producer prices will continue to rebound is a question with profound implications for markets from equities to bonds.
Frail domestic demand will be an obstacle to a government effort to reverse deflation. And although there are early signs of output reductions for some commodities such as coal, steel and copper, it’s not yet clear if the turnaround can be sustained and lead to a long-term rebound in prices.
A Chinese lithium mine that pushed up battery-metal prices when it halted production last month is now gearing up to restart sooner than previously anticipated, a source with direct knowledge of the matter told Bloomberg, underlining the uncertainty around the policy push.
China’s economy, meanwhile, began to decelerate across the board this summer and appears to have lost even more traction in the second half of August, according to Bloomberg Economics. Export growth also slowed to the weakest in six months in August, as a slump in shipments to the US deepened again.
Still, the latest inflation reading in August suggested signs of easing deflation are emerging.
The coal mining and washing industry saw prices gain 2.8 per cent from the previous month, the first increase since October. The ferrous metals sector, including iron and steelmakers, recorded a 2.1 per cent rise.
And despite indications that a boost from the government’s subsidies for consumer goods was fizzling out, prices for durables such as household appliances surged in August, jumping 4.6 per cent from a year earlier in the biggest increase since records began in 2001. A category of goods and services that includes gold jewellery saw a price spike of 8.6 per cent.
“Judging from core and non-food CPI increases, there are signs of easing deflation,” said Serena Zhou, senior China economist at Mizuho Securities Asia.
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