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China consumer inflation stays tepid, factory-gate prices continue to fall

By +Dow Jones Newswires

China's consumer inflation remained tepid last month while factory-gate prices continued to fall, pointing to persistently lackluster demand despite Beijing's efforts to juice up consumption.

The country's consumer-price index rose for a fifth consecutive month in June, edging up 0.2% from a year earlier, the National Bureau of Statistics said Wednesday. That missed the 0.4% rise expected by economists in a Wall Street Journal poll and compared with May's 0.3% increase.

Meanwhile, factory-gate prices stayed in deflation but narrowed their decline from May. The producer-price index fell 0.8% in June from a year earlier, marking a 21th straight month of contraction. The WSJ poll had tipped a 0.7% decline.

Wednesday's figures came as no surprise for many economists, who expect inflation to stay low throughout the year as a drawn-out property slump continues to dent consumer confidence and spending. Beijing's manufacturing drive also risks pushing pr ices down further, economists say.

The risk of deflation hasn't faded and domestic demand remains weak, said Zhang Zhiwei, chief economist at Pinpoint Asset Management. Neither fiscal nor monetary policy are expansionary, as real interest rates are high and fiscal spending soft, Zhang added.

China has leaned on exports as a key growth driver in the first half of the year, but will need domestic demand to recover to drive the economy in the longer term, according to Zhang. If the Federal Reserve starts cutting rates in September, that could give the Chinese central bank some room for interest-rate cuts to help boost the economy, Zhang said.

Wednesday's data showed that core consumer inflation, which strips out more volatile categories such as food and energy, rose 0.6% in June, matching the expansion seen in the prior month. Food prices dropped 2.1% versus May's 2.0% decline, while prices of nonfood items increased 0.8% in June, the same pace as in the previous month.

While Beijing has launched initiatives to stimulate spending, including a nationwide program to encourage households to replace home appliances and cars with new ones, consumers have been reluctant to open their wallets, as evidenced by a third straight month of declining car sales in June.

Policy efforts to revive the property sector, where Chinese families traditionally park a chunk of their wealth, have yielded some slight improvements but economists say Beijing needs to do more if it wants to engineer a real recovery.

The total value of new-home sales from China's 100 biggest real-estate companies dropped roughly 17% last month from a year earlier, narrowing from a 34% decline in May, according to private data provider China Real Estate Information Corp.

Economists say policymakers need to take bolder steps such as establishing a national housing bank to channel more funds to the sector. There are also calls for Beijing to push through structural reforms to encourage household spending and expedite China's transition toward a more consumption-led growth model.

Focus is on a gathering of ruling communist party elites next week, where initiatives to expand the social safety net could be announced, though expectations for more follow-up property aid are low.

Write to Singapore editors at singaporeeditors@dowjones.com

-+Dow Jones Newswires

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07-10-24 0149ET

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