Prices are tumbling across the Chinese economy, according to government data released yesterday, as a flood of goods pouring out of the nation’s vast and ever--expanding factory cities exceeds anemic demand from Chinese households and businesses.
Consumer prices dropped 0.6 percent last month compared with May, the largest month-to-month drop in two years. Consumer prices were still up 2.2 percent from a year ago, but only because prices kept rising fairly briskly through January of this year before beginning what has now become an accelerating descent.
Producer prices, measured at the factory gate, were down 2.1 percent last month compared with a year earlier and down 0.7 percent compared with May. These prices started to weaken late last summer, about six months before consumer prices began eroding.
“Today’s inflation data show that deflation could become a larger concern for China than inflation,” said Ren Xianfeng (任現芳), a China economist at global consulting company IHS.
Falling prices, or deflation, can be as much of a challenge for economic policymakers as inflation. During deflation, businesses struggle to sell enough goods to repay loans that they took out usually on the expectation of rising prices.
Managers at companies across China complain of having to cut prices for their wares even as labor costs continue climbing.
“Business is slower and more challenging this year compared with the same period last year. I would say prices are down overall by 5 percent this year,” said Elaine Yan, the manager of the import and export department at Wuxi Zontai International Corp, a trading company in Wuxi, China, that sells leather gloves, handbags, scissors and embroidery.
However, companies are saving money on raw materials, as the global boom in commodity prices has swung into reverse in recent weeks.
Chinese economic policymakers did little to respond to the country’s slowing economy from mid-March to mid-May. That period happened to coincide with a factional struggle, as a prominent member of the Chinese Communist Party, Bo -Xilai (薄熙來), was removed as party secretary of Chongqing in March and suspended from the politburo in April.
However, the country’s leadership now seems to be reacting with policies aimed at offsetting the economic slowdown.
Chinese Premier Wen Jiabao (溫家寶) went on an inspection tour of east-central China over the weekend and called for more aggressive fiscal and monetary policies.
China lowered benchmark interest rates on Thursday last week for the second time in a month, adding to the first reduction since 2008 and three cuts in banks’ reserve requirements starting in November.
At the same time, Wen said officials will “unswervingly” continue property controls and prevent home prices from rebounding, Xinhua news agency reported yesterday.
China will probably make one more quarter-point cut in interest rates this year and two more half-point reductions in the reserve requirement ratio, according to median estimates in Bloomberg News surveys conducted from Thursday to yesterday.
China’s economy may have expanded 7.7 percent in the second quarter from a year earlier, down from 8.1 percent in the prior three months, analysts estimated ahead of government data due on Friday.
Additional reporting by Bloomberg