In July 2024, China’s economic landscape showcased a mixed picture with consumer inflation rising slightly, while factory-gate prices continued to decline. This nuanced scenario reflects the ongoing economic challenges and policy responses faced by the Chinese government.
Consumer Inflation Shows a Slight Uptick
For the sixth consecutive month, China’s consumer-price index (CPI) saw a modest increase of 0.5% from a year earlier, marking a five-month high. This uptick, though slight, exceeded the 0.4% rise forecasted by economists in a Wall Street Journal poll and was a notable improvement from June’s 0.2% increase.
Key Points on Consumer Inflation:
- Monthly Rise: CPI rose 0.5% in July 2024.
- Comparison: Higher than June’s 0.2% and the expected 0.4%.
- Driving Factors: Food inflation, particularly in pork prices, contributed significantly.
Factory-Gate Prices Remain in Deflation
In contrast to the CPI increase, factory-gate prices, measured by the producer-price index (PPI), continued their downward trajectory. The PPI fell by 0.8% in July, matching the decrease seen in June and marking the 22nd consecutive month of deflation. Economists had anticipated a 0.9% decrease, aligning with current deflationary trends.
Key Points on Factory-Gate Prices:
- Monthly Decline: PPI dropped 0.8% in July.
- Ongoing Trend: 22 months of deflation.
- Economic Implications: Excess industrial capacity and reduced pricing power.
Economic Context and Policy Responses
The rise in consumer inflation is a cautious sign for policymakers who have been striving to boost household spending amid a sluggish economic outlook. However, the persistent deflation in factory-gate prices underscores ongoing challenges within the manufacturing sector.
Current Economic Challenges:
- Consumer Sentiment: Cautious spending due to economic uncertainties.
- Manufacturing Overcapacity: Excess production capacity putting pressure on prices.
Impact of Food Inflation
Food prices, especially pork, were a significant driver of the CPI increase. After 12 months of deflation, food prices stabilized, with pork recording the fastest year-on-year growth since 2022.
Economic Insights from ING:
- Food Prices: Pork prices were a major contributor to the CPI rise.
- Future Trends: Potential for inflation to trend higher in the coming months.
Core Inflation and Non-Food Items
Non-food item prices rose by 0.7% in July, a slight decrease from June’s 0.8% rise. Core consumer inflation, excluding volatile categories like food and energy, increased by 0.4% in July, compared to a 0.6% growth in June.
Core Inflation Details:
- Non-Food Price Increase: 0.7% in July.
- Core Inflation: 0.4% rise, down from June’s 0.6%.
Need for Policy Support
Despite the modest improvement in consumer inflation, economists argue that more substantial policy measures are needed to stimulate economic growth, particularly in the property sector where many Chinese households have traditionally invested their wealth.
Calls for Policy Action:
- Property Sector: Need for more aggressive interventions.
- Fiscal vs. Monetary Policy: Balancing interest rate cuts with fiscal support.
International Monetary Fund’s Proposal
The International Monetary Fund (IMF) proposed a $1 trillion bailout for the property sector, a plan that was rejected by Beijing. Authorities deemed the proposal inappropriate, citing concerns about creating expectations of government bailouts.
China’s Central Bank Actions:
- Interest Rate Cuts: Made to stimulate economic activity.
- Balancing Act: Managing currency stability and bank profitability.
Outlook for Economic Policy
With ongoing low inflation and weak credit activity, there is an expectation for further monetary policy easing. ING’s Lynn Song anticipates at least one more rate cut this year, with the possibility of more if global trends favour such actions.
Future Economic Strategies:
- Monetary Easing: Potential for additional rate cuts.
- Fiscal Measures: Need for direct fiscal support for households.
