China’s headline CPI inflation remains stable in June but PPI shrinks, deflationary risks emerges again

China’s deflationary risk have emerged again, as was seen in the drop in June’s PPI and non-food CPI to a new low not seen since the third quarter of 2016. The price of producer goods shrank 0.3 percent year-on-year in June, the first fall in four months, on the back of soft commodity prices. In the meantime, non-food CPI inflation eased to 1.4 percent year-on-year in June from May’s 1.6 percent.

Since PPI and non-food CPI have a solid correlation with profits in the manufacturing and services sectors, respectively, the undershooting of inflationary expectations will put pressure on real economic activity, noted ANZ in a research report.

Meanwhile, the headline CPI figure remained stable in June, as a rise in food prices was greatly countered by the fall in energy prices. Pork and fresh fruit prices added over 1.2 percentage point to the headline CPI, driving food prices to rise 8.3 percent year-on-year in June from 7.7 percent in May. Meanwhile, fuel prices dropped 6.5 percent, a three-year low.

“The slippage in inflation is likely to weigh on real activities, suggesting a rising need for more counter-cyclical measures. Many small and medium enterprises with low credit ratings now face a contraction in credit in the aftermath of the takeover of Baoshang Bank. If the upcoming credit and domestic activity data disappoint again, there may be increased pressure on the Chinese authorities to launch more stimulus”, added ANZ.

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