BEIJING (Reuters) -China’s factory-gate prices posted the steepest drop in six months in April while consumer prices fell for a third month, underlining the need for more stimulus as policymakers grapple with the economic toll from a trade war with the United States.
A prolonged housing market downturn, high household debt and job insecurity have hampered investment and consumer spending, keeping deflationary pressures alive. Now, the economy is also facing increasing external risks from trade barriers.
However, there are hopes for a de-escalation of tensions as U.S.-China trade talks begin in Switzerland on Saturday.
The producer price index (PPI) dropped 2.7% in April year-on-year, worse than a 2.5% decline in March but was less than economists’ forecast for a 2.8% fall, National Bureau of Statistics data showed on Saturday.
"China still faces persistent deflationary pressure," said Zhiwei Zhang, chief economist at Pinpoint Asset Management. "The pressure may rise in coming months as exports will likely weaken."
"Even if China and the U.S. can make progress and cut tariffs in trade negotiations, tariffs are unlikely to go back to the level before April," Zhang added. "More proactive fiscal policy is necessary to boost domestic demand and address the deflation problem."
Consumer prices eased 0.1% last month from a year earlier, matching a 0.1% drop in March and the forecast in a Reuters poll.
CPI was up 0.1% month-on-month versus a 0.4% fall in March and compared with economists’ forecasts for no change in prices.
Core inflation, excluding volatile food and fuel prices, stood at 0.5% in April from a year earlier, in line with the increase recorded in March.
The Chinese government is implementing a wide range of measures to stimulate consumption across different sectors and last week announced a raft of stimulus measures, including interest rate cuts and a major injection of liquidity.
As the trade war between the world’s two largest economies weighs on exports, China’s retail giants, including JD.com and Alibaba-owned Freshippo, have initiated measures to help exporters pivot to the domestic market. That could further depress prices as business and consumer confidence remain subdued due to the uncertain outlook.
Global investment banks, including Goldman Sachs, have lowered their GDP forecasts for China this year to below the official target of around 5%, attributing the downgrade to the damaging trade war.