Factory deflation in China intensifies as demand falls

By Joe Cash

BEIJING (Reuters) – Factory gate prices in China fell at the fastest pace in seven years in May and faster than expected as faltering demand weighed on a slowing manufacturing sector and clouded the fragile economic recovery .

While rising interest rates and inflation are squeezing demand in the United States and Europe, China, on the other hand, is facing a sharp drop in prices, as factories receive less for their products from major overseas markets.

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

“The risk of deflation still hangs over 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 as exports, imports and factory activity fell in May.

The consumer price index (CPI) rose 0.2% year-on-year, after rising 0.1% in April, but not forecasting a 0.3% increase.

Food price inflation, a key driver of the CPI, slowed to 1.0% year-on-year from 2.4% the previous month. On a month-to-month basis, food prices fell 0.7%.

The Australian dollar eased 0.2% to $0.6704, following a slide in the Chinese yuan after the inflation data.

The government has set a target for average consumer prices in 2023 to be around 3%. Prices are up 2% YoY in 2022.

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

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


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

“So far, monetary policy and fiscal policy have remained tight, as well as weaker 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 rates or release more liquidity into the financial system. The bank cut the reserve requirement ratio for lenders in March.

China’s biggest banks said on Thursday they had lowered interest rates on deposits, bringing some relief to the financial sector and the wider economy by easing pressure on profit margins and cutting costs. loan.

Analysts have lowered 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, after narrowly missing the 2022 target.

(Reporting by Joe Cash; Editing by Sam Holmes)

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