Chinese Prices Fall but Market Looks Past Deflation

Chinese consumer prices fell in the year to May for the fourth month in a row, but at a slightly more moderate pace, reassuring economists who play down the risk that deflation could take root.

Eugene Hoshiko / AP

Producer prices fell more steeply in May, marking the biggest decline in at least a decade, though this was mainly because of a high base of comparison after a commodity price surge last year, also giving analysts little cause for concern.

In any event, niggling worries about deflation could be swept aside later in the week if media reports of a big upside surprise in Chinese factory output figures are confirmed.

China's industrial production, due to be reported on Friday, rose by 8.9 percent in May from a year earlier, well ahead of forecasts and the fastest growth since September last year, two Chinese newspapers reported on Wednesday.

These same papers had accurately reported the inflation data ahead of the official release. For now, though, inflation is the only May data known with certainty.

Consumer prices fell 1.4 percent in the year to May, the National Bureau of Statistics said on Wednesday. Economists had expected a 1.3 percent decline in the consumer price index (CPI) following a 1.5 percent fall in the year to April.

Analysts said that on a seasonally adjusted month-on-month basis, consumer price inflation has been positive for three consecutive months.

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China's producer prices, meanwhile, fell 7.2 percent in the year to May, the rate of decline accelerating from a 6.6 percent drop in April and the lowest since records began in December 1998. Economists polled by Reuters had expected the producer price index (PPI) to fall 6.8 percent.

"The May, PPI fall was a bit deeper than the general expectation, but I still think inflation, rather than deflation, is the key concern," said Zhou Xi, an economist with Bohai Securities in Tianjin.

"China's consumer price index will definitely move into positive territory later this year, and the PPI may move into positive range a little bit later," he added.

The Shanghai Composite Index closed its morning session up 0.45 percent versus a rise of 0.37 percent prior to the data.
     
On The Rebound

With deflation likely to be short-lived, authorities would not take the declining prices as an impetus to cut interest rates, Jun Ma, an economist at Deutsche Bank in Hong Kong said.

"I don't think they'll be easing any more. They look not only at the prices but also at what happens in lending, which is more important than any other indicators," he said. "Lending has been excessive over the past four to five months."

Chinese banks extended 664.5 billion yuan in new loans in May, topping most forecasts, according to separate reports on Wednesday in China's 21st Century Business Herald and Hong Kong's Ming Pao.

To complement the Chinese government's 4 trillion yuan economic stimulus package, banks had already lent a record 5.17 trillion yuan in local-currency loans in the first four months of 2009 -- more than Beijing's minimum target of 5 trillion yuan for the whole of the year.

As evidence accumulates that the government's push is working -- and quickly -- some analysts have begun to point to the prospect of a rising inflation as a more pressing worry.

Goldman Sachs economists Yu Song and Helen Qiao cast doubt on this, though, saying that there was still ample slack in the economy to accommodate a strong revival in business activity.

"High inflation should not be an imminent concern because of the significant negative output gap caused by the dramatic slowdown in the second half of 2008," they wrote in a note to client.

Producer prices tend to be more volatile than consumer prices in China, swinging higher on the ups and dipping lower on the downs. The transmission belt between the two is also quite weak, with PPI heavily influenced by global natural resource prices, while domestically determined food prices constitute about one-third of the CPI index.

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