International Finance
Economy

China June inflation up, but in line with forecasts

HSBC survey shows factory output rising for the first time since January, reports Team IFM Beijing, July 14, 2014: Consumer price rise eased a tad in June in China compared to May, official data released on July 9 said, even as an independent survey of its manufacturing sector – a gauge of the economy’s health – showed factory output rising for the first time since...

HSBC survey shows factory output rising for the first time since January, reports Team IFM

Beijing, July 14, 2014: Consumer price rise eased a tad in June in China compared to May, official data released on July 9 said, even as an independent survey of its manufacturing sector – a gauge of the economy’s health – showed factory output rising for the first time since January and stocks of finished goods declining at the strongest rate since September 2011.

Data from China’s data office, the National Bureau of Statistics, said the price index had gone up 2.3 percent in June from a year-ago period, while it was down by 0.1 percent month-on-month. In fact, economists felt the drop, as compared to May, would allow policymakers more leeway to introduce measures in a bid to propel economic growth.

“Inflation isn’t really going anywhere,” The Wall Street Journal quoted HSBC analyst John Chua as saying. “This probably gives Beijing more policy flexibility. They don’t worry about the economy running at full capacity,” Chua said.

The annualised 2.3 percent spike in consumer price index – a measure of inflationary trends – was in line of what was expected. It was a notch below the increase of 2.4 percent predicted by a panel of 21 analysts polled by Wall Street Journal. A similar Reuters’ poll also forecast an increase of 2.4 percent after a 2.5 percent rise in May.

The increase, however, was considerably lower than the annual target of 3.5 percent set by the government.

Bill Adams, economist at PNC Financial Services Group, found the inflation figures within predictions and auguring well for consumers. “Low inflation is good news for Chinese consumption growth, since it preserves the purchasing value of consumers’ disposable income,” he told CNBC.

China’s first quarter growth this year plummeted 7.4 percent compared to the January 1-March 31 period in 2013, the feeblest pace since 2012. Alongside, its manufacturing sector also notched its worst performance in April since last August.

Analysts polled by Bloomberg in May forecast the growth rate to fall even lower to 7.3 percent in 2014, compared to 7.7 percent last year. This would make it the lowest rate of growth since 1990.

The government, which has pegged an expansion of 7.5 percent for this year, has taken steps such as tax breaks for small businesses and measures to speed up investment in housing. The benign inflation figures should also help to stoke spending.

“What’s reflected here is no big surprise,” analyst Medha Samant told CNBC in a televised interview. “Food prices which make up a big chunk of the CPI basket have been stable in China.”

Samant, who is the investment director of Asian equities at Fidelity Worldwide Investment, said the process could be volatile at times, especially during festival times. “But they sort of trend at this slight inflationary level depending on demand, so we are well within expectations,” she said.

CONSUMER PRICE

On a year-on-year basis, the statistics bureau said, prices rose 2.4 percent in cities and 2.1 percent in rural areas in June, with food prices shooting up 3.7 percent and non-food prices by 1.7 percent.

The prices of consumer goods went up by 2.2 percent and the prices of services grew by 2.6 percent. On average from January to June, the overall consumer prices were up by 2.3 percent over the same period of the previous year.

Month-on-month in June, food prices went down by 0.4 percent, while the non-food prices kept at the same level. The prices of consumer goods decreased 0.2 percent while that of services increased 0.1 percent.

Food prices went up by 3.7 percent year-on-year, while that of for clothing rose 2.6 percent. Another area of immediate concern, prices for household facilities, articles and maintenance services, rose 1.2 percent year-on-year. The index for healthcare grew 1.3 percent.

Year-on-year increases were also seen in transportation and communication costs, which increased 0.6 percent. Of which, prices for fuels and parts for vehicles went up by 5.2 percent.

As a result, prices for touring and outing shot up by 7.8 percent while education service went up by 2.2 percent. Consequently, the price index for recreation, education, culture articles and services grew by 2.1 percent year-on-year.

The data also shows that property prices, always a source of concern in China, went north in the month under review. Prices for residence went up by 2.2 percent year-on-year. Of this, renting was 3.2 percent costlier while water, electricity and fuel went up by 1.2 percent.

“According to estimation, in the 2.3 percent growth in June, the carryover effect of last year’s prices rising accounted for 1.5 percentage points, while new prices rising factors in this year accounted for 0.8 percentage points,” the statistics bureau said in a statement.

MANUFACTURING UP

Meanwhile, what should also bring cheer is the latest manufacturing sector survey report by banking and financial services company HSBC, which said factories signalled the first improvement in overall operating conditions for six months in June.

“Output rose for the first time since January, and at a moderate pace,” the report said. “Growth was supported by the strongest expansion of total new work since March 2013, while new export orders rose for the second month running.”

Increased volumes of new business led to the quickest depletion of stocks of finished goods for nearly three years, while job shedding was the weakest in three months, it added.

The HSBC PMI – a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy – posted at 50.7 in June, up from 49.4 in May, and signalled the first improvement in business conditions since last December.

“That said, the rate of improvement was only slight and weaker than the historical average,” HSBC added.

The report said an improvement in the health of the sector partly reflected the first expansion of total new business placed at Chinese manufacturers for five months during June. “Furthermore, it was the strongest rate of new order growth in 15 months,” it added.

Reports from panellists suggested that improving market conditions boosted sales in the latest survey period. New export business also rose in June, albeit at a marginal pace that was weaker than May’s 49-month high.

Anecdotal evidence suggested that unfinished business rose due to increased amounts of new work. Consequently, stocks of finished goods declined at a moderate pace, which was still the fastest since September 2011.

“The economy continues to show more signs of recovery, and this momentum will likely continue over the next few months, supported by stronger infrastructure investments,” said Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC.

“We expect both fiscal and monetary policy to remain accommodative until the recovery is sustained,” he added.

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