BEIJING, June 9 (Reuters) - China's factory gate prices fell at the fastest pace in seven years in May and quicker than forecasts, as faltering demand weighed on a slowing manufacturing sector and cast a cloud over the fragile economic recovery.
As rising interests rates and inflation squeeze demand in the United States and Europe, China is in contrast battling a sharp decline in prices with factories receiving less for their products from key overseas markets.
The producer price index (PPI) for May fell for an eighth consecutive month, down 4.6%, the National Bureau of Statistics (NBS) said on Friday. That was the fastest decline since February 2016 and bigger than the 4.3% fall in a Reuters poll.
"The risk of deflation is still weighing on the economy," said Zhiwei Zhang, chief economist at Pinpoint Asset Management, 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 rapidly weakening with exports, imports and factory activity falling in May.
The consumer price index (CPI) rose 0.2% year-on-year, speeding up from a 0.1% rise in April but, missing a forecast for a 0.3% increase.
Food price inflation, a key driver of CPI, slowed to 1.0% year-on-year from 2.4% in the previous month. On a month-on-month basis, food prices fell 0.7%.
The Australia dollar eased 0.2% to $0.6704, tracking a fall in the Chinese currency yuan after the inflation data.
The government has set a target for average consumer prices in 2023 to be about 3%. Prices rose 2% year-on-year in 2022.
"We still think a tightening labour market will put some upward pressure on inflation later this year, but it will remain well within policymakers' comfort zone," said Julian Evans-Pritchard, head of China economics at Capital Economics in a note.
"The government's ceiling of 'around 3.0%' for the headline rate is unlikely to be tested and we doubt inflation will become a barrier to increased policy support," he added.
Policymakers have repeatedly signalled their intention to lean on China's 1.4 billion consumers, after the economy last year reported one of its slowest paces of growth in nearly half a century.
"So far, monetary policy 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 rates or release more liquidity into the financial system. The bank cut lenders' reserve requirements ratio in March.
China's biggest banks on Thursday said they had lowered interest rates on deposits, providing some relief for the financial sector and wider economy by easing pressure on profit margins and reducing lending costs.
Analysts have been downgrading their forecasts for economic growth for the year amid continued signs of slowing. The government has set a modest GDP growth target of around 5% for this year, after badly missing the 2022 goal.
Reporting by Joe Cash; Editing by Sam Holmes
Our Standards: The Thomson Reuters Trust Principles.
Magicalsandwichpress on June 9th, 2023 at 23:17 UTC »
I have always wonder if modern monetary is capable of dealing with supply side induced issues. We are beginning to see a gap in inflation form between traditional consumer countries in US, Australia etc and manufacturing hub like China and euro zone. Theoretically the fall in factory gate prices should flow on and provide relief to inflation of their trade partners.
But what does it mean when demand is curbed without a resolution to supply side issues. Do we expect a temporary relief followed by rapid up tick as supply is inelastic?
humtum6767 on June 9th, 2023 at 17:20 UTC »
China seems to have finally hit the middle income trap. As Chinese gets richer and like everyone else lazier they will lose low paying factory jobs. But don’t underestimate China, they right now dominate EV, batteries, solar panels and many other industries. They will do just fine unless they do something really crazy like invade Taiwan.
Admirable_Custard608 on June 9th, 2023 at 13:36 UTC »
China has been having issues with lack of demand ever since COVID. Back then, it was the "zero COVID" drive that discouraged - and sometimes straight out forbade - Chinese consumers to spend money other than by purchasing stuff online, with extensive damage to the services industry.
Analysts were convinced that once China abandoned the zero COVID strategy, the economy would pick up , but that hasn't happened. This may be pointing to more structural issues - the real estate bubble which the government has not dealt with, but also an aging population.
The first move would probably be an easing of financial conditions, but if not done in combination with strong macro-prudential policy that limits real estate investments, it could make things worse.