China faces deflation risks amid weak economy

Consumer inflation eases in world’s second largest economy while factory prices dip lower in May due to lethargic economy

Photo by: Reuters
Photo by: Reuters

Updated Jul 28, 2015

China’s consumer prices rose at a sluggish pace in May while producer prices continued to fall. The slowing of the world’s second largest economy  has led to calls for more fiscal stimulus, with previous monetary easing apparently having little effect. 

Annual consumer inflation was well below China’s consumer inflation target of 3 percent for 2015, as it increased to 1.2 percent in May, driven by a slump in food prices, the National Bureau of Statistics said Tuesday. The index was also lower than the market expectation of 1.3 percent and the 1.5 percent year-on-year rise in April.

Food inflation was 1.6 percent, while non-food prices increased slightly to 1 percent from a year earlier. 

The producer price index (PPI), a price measure of goods at factory gate, remained unchanged at negative 4.6 percent. The data shows a further slide in Chinese factory pricing power which has been contracting for nearly four years now. 

According to analysts fragile producer prices are seen as a major concern as they impact commodity prices, a major concern for China’s industrial heavyweights. Although there has been some recovery, producer prices are still weighed down.

China’s central bank has cut interest rates three times this year in order to ignite domestic demand and lower borrowing costs. It has also reduced the amount of money banks must keep in reserve twice this year, in order to make it easier for banks to lend more of their deposits. 

According to some analysts, China may be heading towards a "liquidity trap" in which additional cash supply fails to convert into productive investment.

TRTWorld and agencies