China's factory deflation slows in July as recovery gains strength

BEIJING (REUTERS, BLOOMBERG) – China’s factory deflation eased in July, driven by a rise in global oil prices and as industrial activity climbed back towards pre-coronavirus levels, adding to signs of recovery in the world’s second-largest economy.

The producer price index (PPI) fell 2.4 per cent from a year earlier in July, the National Bureau of Statistics (NBS) said in a statement, compared with a 2.5 per cent decline tipped in a Reuters poll of analysts and a 3.0 per cent drop in June. Analysts say

China’s industrial output is steadily returning to levels seen before the pandemic paralysed huge swathes of the economy, as pent-up demand, government stimulus and surprisingly resilient exports propel a recovery. Iron ore futures prices in Dalian have rallied over 50 per cent so far this year while prices of steel bars used in construction have jumped 12 per cent.

But some economists warn the recovery could stall amid cautious consumer spending and a resurgence in global infections. Floods due to heavy rainfall have also disrupted production in some parts of the country in recent months.

Consumer inflation edged up in July as the bad weather pushed food prices higher. The consumer price index (CPI) rose 2.7 per cent from a year earlier, compared with an expected 2.6 per cent increase and a 2.5 per cent rise in June. Pork prices rose 85.7 per cent on a yearly basis.

However, core inflation, which excludes food and energy costs, rose a mere 0.5 per cent in July from a year earlier.

“The higher-than-expected price increase will strengthen the determination of the monetary authorities to normalise policies,” said Hu Yuexiao, chief macro analyst at Shanghai securities.

The slowdown in factory deflation is better news for corporate profits and companies’ capability to expand investment. The credit boom has “failed to boost core inflation” as prices of most services are declining due to ongoing anti-virus measures across the nation, said Xing Zhaopeng, an economist at Australia and New Zealand Banking Group Ltd in Shanghai.

China’s economy is continuing its gradual recovery into the second half of the year, driven by production resumptions and the release of pent-up demand.

Futures contracts on China’s 10-year government bonds climbed as much as 0.3 per cent on Monday, the most in more than two weeks. That reflects a drop in risk appetite and stronger expectations for monetary easing, prompted by the slide in core inflation and the easing of a rally in stocks.

“The moderation in core CPI was mainly due to tourist package prices – we usually see a price increase in July due to the holiday season, whereas prices declined by 1.5 per centmonth-on-month last month,” said Michelle Lam, greater China economist at Societe Generale in Hong Kong. “The moderation reflects broader weakness in the consumer service sector, which would recover only gradually due to Covid-19.”

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