The Chinese Economy is Cooling, Producer Prices Fall the Most in Seven Years

Inflation in China remained low in May, as the economy struggles to recover even after the lifting of strict quarantine measures due to Covid at the end of last year, CNBC reports.

The producer price index fell by 4.6 percent, marking the steepest year-on-year decline in seven years, when producer prices recorded a year-on-year drop of 7.2 percent in May 2016.

The consumer price index in China rose by 0.2 percent in May compared to last year, according to government data. Economists surveyed by Reuters had expected a rise of 0.3 percent, but the producer price index in April was at a two-year low of 0.1 percent.

On a monthly basis, prices fell by 0.2 percent while economists had predicted a decline of 0.1 percent.

Low consumer inflation in China and deflation in producer prices contrast with relatively high inflation in major economies around the world. Global central banks, including the U.S. Federal Reserve, have been battling rising prices for over a year, and just this week Canada and Australia defied expectations and raised interest rates.

Cooling Economy

The Chinese yuan has also weakened against the U.S. dollar, and the index tracking the largest companies in Shanghai lost 0.2 percent of its value.

The latest data is one of a series of economic indicators pointing to a cooling economy in China.

The mining and raw materials industry has led to a decline in producer prices, while prices for food, tobacco, and alcohol have contributed to an increase in consumer prices, the data shows.

– The risk of deflation still weighs on the economy. Recent economic indicators are sending consistent signals that the economy is cooling, said Zhiwei Zhang from Pinpoint Asset Management.

Zhang expects the next revision of the Chinese government’s fiscal policy to take place after the announcement of GDP in the second quarter next month.

– We believe that from an economic perspective, from an incentive perspective, and from a geopolitical perspective, we cannot be much worse off than where we currently are, said Andrew Maynard from China Renaissance to CNBC.

From an investment perspective, China ‘is beginning to see at least some return to some level of stability,’ he said, adding that stocks in mainland China remain ‘relatively attractive.’ He also noted that investors continue to choose a longer stay in China and that as a result, the Chinese economy will eventually start to achieve successes and return to its old paths.

– There will definitely be some hurdles to overcome, but at the end of the day, the Chinese economy, from our standpoint, will start to achieve these successes, concluded Maynard.