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China’s inflation rate decelerated in June as factory prices remained in deflationary territory, sparking expectations for increased efforts to stimulate the economy at an important Communist party policy meeting next week.
In June, consumer prices inched up by 0.2 per cent year-on-year, a decrease from the 0.3 per cent growth in May and below analysts’ forecast of 0.4 per cent growth in a Bloomberg poll.
The producer price index dropped by 0.8 per cent in June year-on-year, an improvement from the 1.4 per cent decline in May. Although the factory prices were in line with analysts’ predictions, concerns about weak consumer spending in the second-largest economy persisted.
“The risk of deflation in China remains,” stated Zhiwei Zhang, chief economist at Pinpoint Asset Management. “Domestic demand continues to be weak.”
Consumer prices were particularly affected by declining food costs in China. Prices of fresh vegetables fell by 7.3 per cent, fruit prices dropped by 8.7 per cent, and beef prices tumbled by 13.4 per cent year-on-year in June.
Amidst declining business confidence, Beijing has heavily relied on exports and industrial output for economic growth. However, trade partners such as the EU and the US have started to resist the influx of cheap Chinese goods, accusing China of dumping. The EU recently imposed new import tariffs of up to 38 per cent on Chinese electric vehicles.
Even developing countries, traditionally on good trade terms with China, have begun reacting. Several Latin American nations, including Mexico and Brazil, have imposed new tariffs on steel products from China.
In response to the global backlash, policymakers in Beijing are exploring alternative measures to boost an economy impacted by a prolonged slowdown in the property sector.
Prior to the Chinese Communist party’s third plenum, a significant economic policy conference scheduled for next week, Premier Li Qiang has been engaging in discussions with Chinese economists, entrepreneurs, and foreign businesses to gather ideas and opinions.
However, experts believe that the policies implemented by Beijing have not been adequate to stabilize economic growth. Initiatives such as a housing inventory buyback fund have not halted the decline in real estate prices, and a “trade-in” program for durable goods has not attracted a substantial number of consumers due to its restrictive conditions.
Leading Chinese economists are optimistic that President Xi Jinping will introduce new policies at the plenum to stimulate domestic demand, including enhancing the social safety net as part of his “common prosperity” initiative.
Analysts suggest that potential rate cuts by the US Federal Reserve, expected as soon as September, would enable the People’s Bank of China to further ease monetary policy without concerns about currency pressure.
“We still consider real interest rates to be too high for the current economic conditions and believe that the economy would benefit more from rate cuts,” commented Lynn Song, chief China economist at ING.