China's slowing wholesale
deflation takes pressure off central bank
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[August 09, 2016]
By Elias Glenn and Yawen Chen
BEIJING (Reuters) - China's factory
price deflation moderated further in July, with prices falling at
their slowest pace in two years, taking pressure off the central
bank to cut rates as policymakers turn their focus to structural
reforms and ballooning credit.
A government-led building spree has increased demand for
construction materials, but higher prices are also due in part to
speculation in China's commodities futures market, which has pushed
up Shanghai rebar futures up by 50 percent this year.
The producer price index (PPI) fell 1.7 percent in July from a year
ago, the National Bureau of Statistics said on Tuesday, smaller than
June's 2.6 percent decline. Analysts expect producer price inflation
to turn positive this year for the first time in more than four
years, but the recovery at the factory gate is unlikely to lead to a
rebound in private investment, which has fallen to record low growth
rates.
"The improvement of PPI should benefit the corporate sector's
profitability, but is unlikely to encourage private sector
investment, as the main beneficiaries are heavy industries – which
are dominated by state-owned enterprises," said ANZ economists in a
note.

Non-ferrous metals prices rose 2.8 percent month-on-month in July,
while steel prices increased 0.4 percent.
Downstream prices, however, remained subdued in July with the
consumer price inflation accelerating at its weakest pace in six
months as food price gains slowed.
The consumer price index (CPI) rose 1.8 percent in July from a year
earlier, compared with a 1.9 percent increase in June, and matching
this year's low hit in January. Analysts polled by Reuters had
expected a 1.8 percent gain.
Consumer inflation has remained well below China's official target
of around 3 percent in 2016, despite concerns that severe summer
flooding, which has disrupted public infrastructure and agricultural
production, would increase inflationary pressures.
Food prices continued to moderate, rising 3.3 percent in July
compared with a 4.6 percent gain in June. Prices of pork rose only
16.1 percent versus a 30.1 percent increase in June as demand for
the Chinese staple meat continued to cool from peaks hit earlier
this year.
Non-food inflation, however, rose 1.4 percent, compared with June's
1.2 percent gain.
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A woman holds a bottle of alcohol product at a supermarket in
Nanjing, Jiangsu Province, China, August 6, 2016. Picture taken
August 6, 2016. China Daily/via REUTERS

Healthcare costs rose 4.3 percent year-on-year in July, up from a 3.8 percent
gain in June, which Merchants Securities economist Yan Ling in Shenzhen said
reflects a wider improvement in demand for such products.
Similarly, rises in other price categories showed increasing demand for a wider
range of consumer goods and services including horticulture, pet care and
retirement services, Yan said.
Low inflation means Beijing has room to loosen monetary policy if needed, but
policymakers appear to have disparate views over how much stimulus is needed to
stoke economic growth, if any, and what form it should take.
However, strengthening producer prices mean there is likely less need to ease in
the short-term, analysts say. China's central bank has not adjusted interest
rates since October 2015.
"Policymakers are likely to focus their attention on more
pressing issues, such as addressing credit risks and structural imbalances,"
Julian Evans-Pritchard at Capital Economics said in a note.
(Reporting by Yawen Chen and Elias Glenn; Editing by Sam Holmes)
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