US trade war drives China’s producer prices into deflation, as pork prices send consumer inflation higher

10-Aug-2019 Intellasia | South China Morning Post | 6:02 AM Print This Post

The US-China trade war is forcing China’s manufacturers to sell their products at a discount rate, driving prices into deflationary territory in July, data released on Friday showed.

The producer price index (PPI), reflecting the prices that factories charge wholesalers for their products, fell into negative territory at minus 0.3 per cent compared to a year earlier, down from the flat reading in June.

The release showed the pressure being placed on manufacturers in China due to tariffs the United States have placed on Chinese imports, but also the wider malaise in the global economy, which analysts are predicting is veering dangerously close to recession.

PPI last dropped into negative territory in August 2016, having remained in deflationary territory for 54 consecutive months from March 2012.

One major concern is the negative economic impact if price declines become entrenched, and wholesalers delay their purchases in the expectation of lower prices in the future.

China’s consumer inflation, meanwhile, remained high in July, due in large part due to the cost of pork, with the African swine fever crisis ravaging the pig population in the world’s biggest consumer of pork.

The consumer price index (CPI) rose to 2.8 per cent, the highest reading since February 2018, and a slight increase on the 2.7 per cent figure reported in May and June. Pork prices rose by 27 per cent year-on-year.

The continued rise in prices is eroding the purchasing power of Chinese consumers at a time when they are already anxious about their incomes and job prospects. Policymakers in Beijing are also counting on stronger consumer spending to offset the impact of the weakening economy and the trade war with the United States.

China’s pork and hog prices are likely to break the previous record high in 2016 by the fourth quarter

Pan Chenjun

Dong Yaxiu, a director at the National Bureau of Statistics (NBS), said that along with soaring pork prices, the price of fresh fruit rose by 39.1 per cent in July from a year earlier, while the prices of eggs, chicken, beef, lamb and fresh vegetables all rose by between 5.2 per cent and 11.4 per cent.

But it is the continued rise in pork prices that causes most concern, with China’s pork prices projected to reach a record level by the fourth quarter of 2019 due to the impact of African swine fever, according to a report Rabobank released at the end of July.

“China’s pork and hog prices are likely to break the previous record high in 2016 by the fourth quarter,” said Pan Chenjun, the report’s author and a senior analyst for animal protein at Rabobank.

Pork is thought to be the single-largest element in the basket of consumer goods used to calculate CPI. China consumes around half the global total annually, meaning that a spike in pork prices affects the average consumer disproportionately.

Sluggish PPI is also an indication of a slowdown in China’s industrial economy, as shown in other indicators. The official manufacturing purchasing managers’ index (PMI) a gauge of sentiment among factory operators rose to 49.7 in July from 49.4 in June, but remained below the 50 break-even level, signalling an overall contraction in activity in the sector.

The NBS gave few details on what caused the PPI deflation, pointing to the “means of production” a general term used to describe capital goods like raw materials and machinery falling by 0.7 per cent. Prices in the oil and gas exploration industry fell by 8.3 per cent, while prices for oil, coal and other fuel processing industries fell by 5.1 per cent.


Category: China

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