So will China’s central bank cut interest rates for a 4th time since last November after a sharp slowing in consumer inflation in May and no change in the intense deflation gripping the country’s manufacturing and service sectors?
Yesterday’s inflation report for May shows consumer and producer price inflation continues to fall month by month as the disinflationary pressures in the economy (a function of falling commodity prices, weak demand, especially in property, and a stronger currency, plus the deflation in manufacturing) intensify.
The central bank cut its main interest rates for the third time in six months last month to try and boost activity in the economy – especially property (there were also changes which relaxed property lending rules). As well reserve asset ratios for banks have been eased. But all this has little impact on inflation and demand in the economy.
Consumer inflation in China rose just 1.2% in May, on an annual basis, down from the 1.5% in April, but heading back to the very low 0.8% recorded in January. From April, the CPI fell 0.2%, after it eased 2% from March.
China inflation print lower than expected
.png)
China’s producer price index fell 4.6% in May from a year earlier, unchanged from April and worse than forecast (market economists have been far from the mark on the PPI). It was the 39th month in a row producer prices have fallen. In May the PPI fell 0.1% from April, when it fell 0.3% from the preceding month.
Yesterday’s weak consumer and producer price reports adds pressure for another relaxing of monetary policy.
Data releases tomorrow for industrial output, retail sales and urban investment (including property) will add their own pressure to the move for more stimulus by coming in weak or weaker than expected.
There is now a very real chance that the deflation hitting the producing businesses in China is starting to impact at the consumer level, aided by falling prices for key commodities such as petrol and oil products (more retail price cuts have just been announced by the government).
The country’s statistics bureau said falling fruit and vegetable pricers helped push down the CPI while non-food prices are rising. But the question remains how long can that go on with petrol prices falling and other commodity based prices weakening.
The big problem these analysts don’t consider is the sharp increase in real interest rates caused by slowing inflation, or the deep deflation for manufacturing and much of the service sector and many small retail businesses. That’s why the interest rate cuts have been some relief, but not enough.
And with margin lending booming, along with the local stockmarket (up 9% in the past eight days alone), you have to wonder if there are any new loans available for businesses outside financial services and individual investors.
