China: Deflation?

Econintersect: China has reported CPI (Consumer Price Index) for March down 0.5% from February. The PPI (Producer Price Index) was also down for the 25th consecutive month, even longer than the deflation during the Great Recession.  (Note: Some confusion may arise when reading various reports about the data from China.  Many are reporting CPI inflation at 2.3%.  That is the first quarter year-over-year number.)  So the question rermains (Econintersect has asked it before):  Is deflation a risk for China?

Here is a report from MNI News, Deutsche Borse:

BEIJING (MNI) – Data released by the National Bureau of Statistics
on Friday:

. CPI PPI

——————–

March 2.4 -2.3

Consensus 2.4 -2.2

Previous 2.0 -2.0

All figures pct y/y unless otherwise indicated

FACTORS:

— 1Q CPI +2.3% y/y vs +2.4% y/y 1Q 2013

— March CPI -0.5% m/m vs +0.5% m/m Feb
— March food prices +4.1% y/y vs +2.7% y/y Feb
— March non-food CPI +1.5% y/y vs +1.6% y/y Feb
— 1Q PPI -2.0% y/y vs -1.7% y/y 1Q 2013
— March PPI -0.3% m/m vs -0.2% m/m Feb

TAKEAWAY: Consumer price inflation was in line with analyst expectations.
The increase, from +2.0% in February, was below January’s +2.5% and well under
this year’s target at around +3.5%. Food prices were again the swing factor,
with non-food CPI actually easing slightly over February.

The National Bureau of Statistics said falling vegetable and fruit prices
were the main reason for the month-on-month drop in CPI as the weather improves.
Those price movements accounted for 0.55 percentage point of the 0.5% m/m
decline. On a yearly basis, rising lamb and beef prices added 1.23 percentage
points to the 2.4% y/y growth.

Producer prices, not consumer prices, are causing the greater concern.

Confirmation of a 25th straight month of falling producer prices explains
why the central government is in no rush to pump more stimulus into the economy.
This is the longest unbroken run of producer price deflation since the Asian
Financial Crisis and highlights the extreme bloat in the Chinese industrial base.

Premier Li Keqiang has said that the inflation picture at the start of 2014
has been better than expected, and that the economy is continuing to produce
jobs. Against that backdrop, and faced with the pressing need to tackle
industrial overcapacity, senior government sources have told MNI that Beijing
may be willing to tolerate sub-par headline growth rates and will resist the
temptation to ease policy.

–MNI Singapore Bureau; tel: +63 91-7888-6714; email: [email protected]

The following charts are from Trading Economics:

So the official CPI inflation rate shown below is still well above a deflation level.

But the question is, how long with the bloated industrial sector with entrenched producer level deflation not start to leak into the rest of the economy.

John Lounsbury

Sources:

• China slowdown concerns reinforced by falling prices (Simon Rabinovitch, Financial Times, 11 April 2014)

• China March CPI Within Expectations But PPI Drop Deepens (MNI, Deutsche Borse Group, 10 April 2014)

• China Economic Indicators (Trading Economics, 11 April 2014)

• Is China Trapped in Deflation? (GEI News, 09 August 2013)