Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

China August factory deflation deepens, prices fall most in three years; pork prices soar

EconomySep 10, 2019 03:00AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

By Yawen Chen and Se Young Lee

BEIJING (Reuters) - China's factory-gate prices shrank at the sharpest pace in three years in August, falling deeper into deflationary territory and reinforcing the urgency for Beijing to step up economic stimulus as the trade war with the United States intensifies.

Analysts say flagging demand at home and abroad is forcing some Chinese businesses to slash prices to win new orders or cut output to contain costs, chipping away at already-lean profits and further dampening business confidence.

The fall was mainly driven by weakness in raw material prices, especially for energy and metals.

China's producer price index (PPI) dropped 0.8% from a year earlier in August, widening from a 0.3% decline seen in July and the worst year-on-year contraction since August 2016, National Bureau of Statistics (NBS) data showed on Tuesday.

(Graphic: China's factory-gate prices shrank at the fastest pace in three years, pork prices surge - https://fingfx.thomsonreuters.com/gfx/ce/7/6349/6331/ChinaPPICPIPork.png)

Analysts polled by Reuters had expected the index to have shrunk by 0.9%, the second straight month of outright declines.

"With demand-side pressures on prices increasingly subdued, we think that further monetary easing is on the horizon," Capital Economics said in a note to clients, predicting producer deflation will get worse in coming months.

Share prices in Shanghai fell as the data pointed to growing profit pressure.

The central bank on Friday cut banks' reserve requirements for the seventh time since early 2018 to free up more money for lending, and analysts widely expect it to cut some of its key lending rates next week to reduce corporate borrowing costs.

China's central bank governor Yi Gang said in late July that interest rate levels were appropriate and that cutting rates would mainly deal with the danger of deflation. But he said at the time that price changes in China remained moderate.

Surging food prices and higher consumer inflation will not be a barrier to policy easing, analysts said.

The consumer price index (CPI) rose 2.8% from a year earlier, unchanged from July and beating analysts' expectations at 2.6%, but still below China's annual target of around 3%.

"Despite the higher CPI, we expect the People's Bank of China (PBOC) to cut interest rates in the fourth quarter this year," ANZ said.

"China's declining producer price index (PPI) carries more weight with policymakers in their monetary policy decisions, in our view."

The food price index rose 10% on-year, from a 9.1% jump in July and the highest since January 2012. Pork prices soared 46.7%, after an increase of 27% in July, as African swine fever decimates the country's herds.

Most analysts expect pork prices to continue rising as supply plummets, spilling over into prices of other food items.

Core consumer inflation, which excludes food and fuel, remained mild, however. It picked up to 1.5% on-year after a 1.3% gain in the prior month.

"We do not think elevated inflation will lead PBOC to raise rates, given still-mild core inflation, although it could put some limit on rates declining too much," Goldman Sachs (NYSE:GS) said in a research note.

DEFLATIONARY PRESSURE

Weakness in producer prices has also been seen recently in other major economies including the United States, Canada and the euro zone, raising concerns over demand worldwide as the Sino-U.S. trade dispute upends global supply chains.

China's oil and gas extraction industries saw the greatest deflationary pressure in August, notching up price declines of 9.1% on year. The oil, coal and other fuel processing industries saw prices fall 5.9%.

Demand for major building materials faltered in August and manufacturing activity contracted more steeply than expected, while the central government remained reluctant to ease curbs on the property sector, a major growth driver, as it tries to keep home price rises in check.

Spot prices for steel reinforcing bars continued to hover below the level seen in the same period last year, worsened by a seasonal slackening in construction activities during summer.

Imports of unwrought copper, another cornerstone material in construction and a key gauge of demand, also sank in August.

Analysts expect more pain for Chinese exporters in upcoming months, with more U.S. tariff measures set to take effect on Oct. 1 and Dec. 15.

Both sides agreed on Thursday to hold high-level talks in early October, but analysts remain doubtful that a trade deal could be forged in the next few quarters.

Analysts say China's economic growth has likely cooled further this quarter from a near 30-year low of 6.2% in April-June, and could test the lower end of the government's 6-6.5% 2019 target. Data on Sunday showed August exports and imports both shrank.

With the trade war expected to grow longer and costlier, an increasingly number of analysts have been lowering their China outlooks in the last few weeks. Fitch Ratings was the latest on Monday, cutting its 2020 growth forecast to 5.7% from 6.0%.

(Graphic: China's economic trends - http://fingfx.thomsonreuters.com/gfx/rngs/CHINA-ECONOMY/010031D432Z/index.html)

China August factory deflation deepens, prices fall most in three years; pork prices soar
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email