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China’s factory gate deflation last month fell at the fastest pace in nearly two years as US President Donald Trump’s trade war and intense competition in the world’s largest manufacturer weighed on producer prices.
Producer price inflation fell 3.6 per cent year on year in June, official data from the National Bureau of Statistics showed on Wednesday, greater than a 3.2 per cent drop forecast in a Reuters poll of analysts and a decline of 3.3 per cent in May.
The negative reading, the weakest in 23 months, will increase policymakers’ determination to intervene in industries where overcapacity is helping to drive aggressive price competition, analysts said.
Consumer prices, meanwhile, edged into growth territory last month for the first time since January, rising 0.1 per cent, reversing a decline of 0.1 per cent in May and beating analyst expectations of flat prices.
Beijing has also increasingly focused on stimulating domestic consumption, as policymakers seek to counter economic weaknesses such as industrial oversupply and a prolonged slump in the property sector.
But Carlos Casanova, senior economist for Asia at UBP, said the positive signal for consumer price inflation would be overshadowed by the producer figure.
“We continue to see a lot of overcapacity in upstream sectors, enough to warrant the authorities to officially come out and initiate policies to curb overcapacity,” Casanova said.
While lower energy and raw material costs had contributed to producer price deflation, the trade war with the US, which kicked off in April, was an important factor, said Dong Lijuan, chief statistician of the urban department of China’s NBS.
“The prices of some industries with a relatively high export share are under pressure,” said Dong. “The slowdown in global trade growth and the uncertainty of the international trade environment have affected corporate export expectations.”
Dong said the price falls were particularly significant in export industries such as computers, communications and other electronic equipment manufacturing and textiles. The price of solar power equipment and electronic components fell 10.9 per cent year on year in June.
The producer price contraction will underline Beijing’s concerns that deflationary pressures are becoming endemic across Chinese industry, with scores of brands in sectors such as electric vehicles fighting for market share.
Chinese President Xi Jinping has called for policymakers to resolve “disorderly” price competition, and state and Communist party media have stepped up calls against what they call “involution”, or destructive price wars.
The leadership’s increased focus on overcapacity follows years of denying complaints from trading partners that Chinese industries were relying on exports as demand at home lagged, flooding their markets with low cost goods and fuelling deindustrialisation abroad.
Dong said some government policies aimed at deflation and overcapacity were beginning to take effect.
“Policies to boost consumption have led to a year-on-year rebound in the prices of some daily necessities,” he said.
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