MNI DATA ANALYSIS: China Deflation Risks Emerge as PPI Stalls

     BEIJING (MNI) - China faces renewed deflation risks, as producer prices in

June posted no increase from last year. Consumer price index held steady as

declining energy prices largely offset rising food prices. The indicators are

not significant enough to warrant changes in policies, according to economists.

     CPI remained at 2.7% y/y in June, unchanged from May's 15-month high, data

released by the National Bureau of Statistics showed. That was in line with a

survey forecast by MNI. PPI fell to zero from 0.6% in May, the lowest level

since August 2016, missing 0.2% forecast by MNI.

     Policymakers are more focused on reducing the financing cost for private

and small companies, rather than managing inflation, Deng Haiqing, chief

economist at WallstreetCN, said in a report. 

     --PEAKING CPI

     The high inflation was still mostly caused by higher prices of fruits and

pork. Fresh fruit prices rose 42.7% y/y, faster than 26.7% gain in May, mainly

due to extreme weather and last year's low base of comparison. Pork price

continued to accelerate to 21.1% y/y, compared to May's 18.2% gain. These two

categories drove headline CPI by 0.71 and 0.45 percentage point respectively.

     Economists generally expect record high fruit prices to fall with increased

seasonal supplies, though pork prices have shown strong upward momentum, due to

supply disruptions caused by African swine fever.

     Fuel prices fell by 6.5% y/y to a three-year low after the slump of oil

prices, helping moderate the effect of higher food prices.

     While CPI is "very unlikely" to break the government's 3% ceiling this

year, it could persist at the current level due to continued high pork prices.

     --PPI DEFLATION

     Low oil prices continued to weigh on ex-factory prices, especially in the

oil, coal and other fuel processing as well as oil and gas exploration sector,

which reversed the gains in May and fell 1.9% and 1.8% y/y respectively.

     Low oil prices will exert downward pressure on July PPI, and PPI is "very

likely" to witness negative growth this year, Deng said.

     However, further countercyclical policies boosting growth, such as

infrastructure spending, could partially offset the downward pressure on

industrial product prices. 

--MNI Beijing Bureau; +86 (10) 8532-5998; email: wanxia.lin@marketnews.com

--MNI Beijing Bureau; +86 10 8532 5998; email: william.bi@mni-news.com

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