China's cooling inflation data points to a slower recovery
China's consumer price index (CPI) increased by 0.2% year-on-year in June, falling short of the 0.4% rise anticipated by market analysts according to a Reuters poll. This growth was a slight decrease from the 0.3% increase recorded in May. Core CPI, which excludes volatile food and energy prices, rose by 0.6% year-on-year, slightly below the 0.7% increase for the first six months of the year. Meanwhile, the producer price index (PPI), which measures factory-gate prices, fell by 0.8% year-on-year, aligning with market expectations and continuing a 21-month streak of decline.
The inflation data highlights the ongoing weak consumer demand in China, with core CPI rising at a slower pace and overall CPI missing expectations. The news supports a global disinflation story which is expected to weigh in on monetary policy in the coming months.
Pork prices surged by 18.1% year-on-year in June, while beef prices fell by 13.4%, indicating mixed trends within the food sector. Tourism prices also saw a modest increase of 3.7% year-on-year, though this was a decrease from the 4.5% rise observed in May. These mixed signals point to uneven recovery in different segments of the economy.
The producer price deflation, which has persisted for nearly two years, underscores the challenges facing China's manufacturing sector. The consistent decline in PPI suggests ongoing deflationary pressures and weak demand for industrial products. Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, highlighted the risk of deflation and pointed to sluggish consumer demand as a significant drag on the economy. This indicates that domestic demand recovery remains very limited despite various government measures to support the economy.
Market reactions to the inflation data were mixed. The AUD/USD currency pair was largely unaffected, showing a marginal loss of 0.04% to trade near 0.6635. However, Chinese stocks dipped following the disappointing inflation figures, with the Shanghai Composite Index falling by 0.68% to close at 2,939.36, and the Hang Seng Index dropping by 0.29% to 17,471.67. These declines highlight investor concerns over the persistent deflationary pressures and the slow pace of economic recovery.
The weak inflation data suggests that the Chinese economy is struggling to gain momentum, despite official estimates indicating a 5.1% growth in Q2 year-on-year. Analysts are now calling for further government stimulus to boost domestic demand and counteract the deflationary pressures. A Reuters poll suggested a significant increase in new yuan loans in June, more than doubling from May, as the central bank continues its policy support to stimulate the economy.
China's economic struggles have broader implications for global markets. The MSCI's Asia ex-Japan Stock Index fell by 0.19%, reflecting concerns over China's economic performance. However, Japan's Nikkei Index rose by 0.61%, underscoring differing regional economic dynamics. China's economic issues could potentially influence international trade policies and market strategies, highlighting the interconnected nature of global economies and the potential for further volatility in global markets.