By Joe Cash
BEIJING (Reuters) – China’s consumer inflation cooled more than expected in March as producer price deflation continued, keeping pressure on policymakers to unleash further stimulus as demand remains weak .
Worrying deflationary pressures in the world’s second-largest economy appear to have slowly eased, even as the prolonged housing crisis continues to weigh heavily on consumer and business confidence.
Consumer prices rose a modest 0.1% in March from a year earlier, National Bureau of Statistics (NBS) data showed on Thursday, compared with a 0.7% increase in February, the first gain in six months, and an increase of 0.4% according to Reuters. survey.
January-February data and factory surveys for March showing improving demand came as a relief to Chinese officials trying to spur a weak post-COVID recovery, but economists warned of distortions in the Lunar New Year.
“Seasonal effects definitely played a role: food prices rose sharply during the Chinese New Year in February and fell thereafter,” said Xu Tianchen, senior economist at the Economist Intelligence Unit.
“More broadly, the overcapacity problem is transmitting to prices in a way that will hamper the People’s Bank of China’s efforts to reflate the economy,” Xu added. “Vehicle prices fell 4.6% annually, which may suggest that manufacturers are introducing deeper price cuts into the distribution and sales process.”
Producer prices fell 2.8% year-on-year in March, extending the previous month’s 2.7% decline and extending a year-and-a-half-long streak of declines. On a monthly basis, the PPI fell by 0.1%.
“Although consumer prices are no longer falling, rapid investments in production capacity continue to weigh on factory prices,” said Julian Evans-Pritchard, head of China economics at Capital Economics.
China has rolled out a series of incentives in recent months to spur household spending, including easier rules on auto loans, but consumers remain cautious about large purchases amid worries about the unstable economy and weak job market .
Annual core inflation, excluding food and energy price volatility, was 0.6% in March, lower than February’s 1.2%. The consumer price index fell 1.0% on a monthly basis, cooling from February’s 1% gain and worse than the 0.5% decline economists had expected.
REFLECTING THE ECONOMY
The People’s Bank of China (PBOC) pledged earlier this month to support growth in household incomes and meet reasonable consumer demand for credit, while curbing “blind expansion” in sectors with excess capacity.
Some analysts believe the central bank faces a challenge as more credit flows to production than consumption, exposing the economy’s structural flaws and reducing the effectiveness of its monetary policy tools.
“While we believe data will gradually demonstrate that China is not stuck in a deflationary spiral, inflation remains well below target and, looking at economic fundamentals alone, we believe the economy would benefit from further rate cuts. rates,” said Lynn Song, chief economist for Greater China at ING.
The prolonged weakness in demand also raises questions about the government’s difficulties in finding new models of economic growth.
Foreign direct investment flows are slowing, according to balance of payments data, as foreign companies repatriate profits to benefit from higher interest rates in the United States while the PBOC keeps rates low to encourage lending.
“Interestingly, CPI inflation surprised on the upside in the U.S. and on the downside in China,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
“This indicates that monetary policy positions in these two countries may also continue to diverge, so the interest rate gap in these two countries is likely to persist.”
Fitch Credit Rating cut its outlook on China’s sovereign credit rates to negative on Wednesday, citing risks to public finances as growth slows and debt continues to rise.
(Reporting by Joe Cash; Additional reporting by Qiaoyi Li; Editing by Jacqueline Wong)