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MNI: Weak Price Data Adds To Rate Pressure On PBOC- Economists
China’s economy continued to show disinflationary pressure in May as both CPI and PPI declined m/m and annual factory gate inflation fell to the lowest level in over seven years, with economists telling MNI that the People’s Bank of China (PBOC) is likely to cut the MLF moderately, but faces constraints around further Fed rate hikes and a weakening yuan.
Producer prices fell 4.6% y/y in May, following on from a 3.6% decline in April, dipping to the lowest year-on-year reading in over seven years, with CPI gaining 0.2% y/y, up from April’s 0.1%, according to data released by the National Bureau of Statistics on Friday.
May’s price data - which showed weakness beyond just base effects - strengthens calls for the authorities to increase policy support, following Wednesday's announcement that China’s export sector also contracted by 7.5% y/y in May.
“Given the situation I can see the PBOC cutting the MLF moderately by around 10bps,” Nathan Chow, China Economist at DBS Bank told MNI Friday. “There might be calls for a bigger cut but the central bank is constrained by yuan weakness and concerns over future Fed hikes."
Hao Hong, Chief Economist at Grow Investment Group, told MNI any possible PBOC rate cuts may prove ineffective. “The economy is suffering from low household confidence and consumption demand, the PBOC has space but rate cuts are not so effective in this situation,” he said.
“Core CPI falling 0.6% y/y this month really highlights that underlying demand remains the problem,” Chow noted, addingL “Policy makers need to combine rate cuts with wider measures to stimulate demand.”
Pantheon Macroeconomics, a UK-based economic research consultancy, said in a note the chances of a symbolic 5bp broad rate cuts in June and July to bolster consumer and private business confidence were higher following the latest inflation data.
There had been talk of the PBOC easing some of its policy rates even before the weak inflation data, with some pointing to weaker consumption indicators. (See MNI: PBOC Rate Cut Expectations Build After Deposit Cuts)
Earlier Friday, PBOC Governor Yi addressed concerns over the weak inflation data in a written statement on the PBOC website, saying that recent weakness is largely due to "a time lag between post-reopening supply and demand.” Yi added he expects price inflation to improve in H2. (See MNI BRIEF: China CPI To Edge Higher In H2 : PBOC Yi - Bonds & Currency News | Market News)Zhao Qinghe, an NBS Senior Statistician, said the data "shows China's economic prosperity has declined, and the foundation for recovery of development still needs to be consolidated,” according to a statement on the NBS website
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