China’s factory deflation increases as demand slows

BEIJING, June 9 (Reuters) – China’s factory prices fell at the fastest pace in seven years in May and faster than forecasts, as faltering demand weighed on a slowing manufacturing sector and cast a cloud over the fragile economic recovery.

As rising interest rates and inflation squeeze demand in the US and Europe, China, on the other hand, is fighting a sharp price drop with factories receiving less for their products from key foreign markets.

The producer price index (PPI) for May fell for the eighth consecutive month, down 4.6 percent, the National Bureau of Statistics (NBS) said on Friday. It was the fastest decline since February 2016 and bigger than the 4.3% drop in a Reuters poll.

“The risk of deflation continues to weigh on the economy,” Zhiwei Zhang, chief economist at Pinpoint Asset Management, said in a note. “Recent economic indicators send consistent signals that the economy is cooling,” he added.

China’s economy grew faster than expected in the first quarter, but recent indicators show demand is weakening rapidly with exports, imports and factory activity falling in May.

The consumer price index (CPI) rose 0.2% year-on-year, picking up from a 0.1% rise in April, but missing a forecast for a 0.3% increase.

Food price inflation, a key driver of the CPI, eased to 1.0% from 2.4% last month. On a monthly basis, food prices fell by 0.7 per cent.

The Australian dollar fell 0.2% to $0.6704, tracking a fall in the Chinese currency yuan after the inflation data.

Reuters graphics

The government has set a target that average consumer prices in 2023 should be around 3%. Prices rose 2% year-on-year in 2022.

“We still believe that a tighter labor market will put some upward pressure on inflation later this year, but it will remain well within policymakers’ comfort zone,” Julian Evans-Pritchard, head of China economics at Capital Economics, said in a note.

“The government’s ceiling of ‘around 3.0%’ for the headline rate is unlikely to be tested and we doubt that inflation will become a barrier to increased policy support,” he added.


Policymakers have repeatedly signaled their intention to lean on China’s 1.4 billion consumers, after the economy last year reported one of the slowest growth rates in nearly half a century.

“So far, monetary and fiscal policy have remained tight, along with lower income growth, so domestic demand is depressed,” said Dan Wang, chief economist at Hang Seng Bank China.

Some economists expect the People’s Bank of China (PBOC) to cut interest rates or release more liquidity into the financial system. The bank cut lenders’ reserve requirements in March.

China’s biggest banks said on Thursday they had cut interest rates on deposits, providing some relief to the financial sector and the wider economy by easing pressure on profit margins and reducing lending costs.

Analysts have downgraded their forecasts for economic growth for the year, amid continued signs of a slowdown. The government has set a modest GDP growth target of around 5% for this year, having badly missed the 2022 target.

Reporting by Joe Cash; Editing by Sam Holmes

Our standards: Thomson Reuters Trust Principles.

Joe Cash

Thomson Reuters

Joe Cash reports on China’s economic affairs, covering domestic fiscal and monetary policy, key economic indicators, trade relations and China’s growing engagement with developing countries. Before joining Reuters, he worked on UK and EU trade policy across the Asia-Pacific region. Joe studied Chinese at the University of Oxford and is a Mandarin speaker.

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