China’s consumer price growth weakens ahead of Communist party economic meeting

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China’s consumer price growth slowed in June while factory prices eased but remained in deflationary territory, prompting hopes for stronger efforts to spur the economy at an important Communist party policy gathering next week.

Consumer prices rose 0.2 per cent year on year in June, according to official data released by the National Bureau of Statistics on Wednesday, a retreat from an 0.3 per cent rise in May and less than a forecast of 0.4 per cent growth by a Bloomberg poll of analysts.

The producer price index declined 0.8 per cent last month year on year, improving from a 1.4 per cent contraction in May. The factory gate price gauge has gained strength over the past three months, and was in line with analysts’ forecasts, but the data underscored concerns about tepid consumer spending in the world’s second-largest economy.

“The risk of deflation has not faded in China,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. “Domestic demand remains weak.”

Consumer prices in the world’s second-largest economy were in particular affected by falling costs of food. Fresh vegetable prices dropped 7.3 per cent on year during June, while prices of fruit fell 8.7 per cent and those of beef tumbled 13.4 per cent. 

Battered business confidence has left Beijing largely reliant on exports and industrial output to drive economic growth. But that strategy is reaching its limits, as trade partners including the EU and the US have begun to object to the glut of cheap goods, accusing China of dumping. The EU last month announced new import tariffs of up to 38 per cent on Chinese electric vehicles.

Even developing nations, which tend to be on better trade terms with Beijing, have begun to react. Several Latin American countries, including Mexico and Brazil, have slapped new levies on steel products from China.

The brewing global backlash has spurred policymakers in Beijing to seek alternative ways to support an economy hindered by a prolonged property sector slowdown.

Ahead of the Chinese Communist party’s third plenum, an important economic policy meeting to be held next week, Premier Li Qiang has embarked on a listening tour, gathering ideas and opinions from Chinese economists and entrepreneurs as well as foreign businesses. 

But experts said the policies Beijing has rolled out have not been sufficient to stabilise economic growth. A fund to allow the government to buy up unsold housing inventory has not stemmed the slide in real estate prices, while a “trade-in” programme for home appliances and other durable goods has had too many strings attached to attract consumers en masse.

Top Chinese economists are hopeful that President Xi Jinping will unveil new policies at the plenum to stimulate domestic demand, including bolstering the social safety net as part of his “common prosperity” drive. 

Analysts said that rate cuts by the US Federal Reserve, which may come as soon as September, would also allow the People’s Bank of China to further loosen monetary policy without concern about pressure on the currency. 

“We continue to see real interest rates as too high for the current state of the economy and believe the economy would benefit more from rate cuts,” said Lynn Song, chief China economist at ING.

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