China’s soft May inflation increases calls for fiscal stimulus

China’s consumer inflation eased while producer prices stayed stubbornly in deflation in May, bolstering the case for fiscal stimulus as the world’s second-largest economy shrugs off monetary easing.

Annual consumer inflation eased to 1.2 percent in May thanks to a sharp drop in food costs, particularly pork, National Bureau of Statistics data showed on Tuesday, lower than a forecast 1.3 percent and the previous month’s 1.5 percent.

The producer price index (PPI) stayed unchanged at a negative 4.6 percent, meaning that Chinese factory pricing power is sliding deeper into its fourth year of contraction.

“We are basically in the midst of a balance sheet recession with Chinese characteristics,” said Andrew Polk, economist at the Conference Board in Beijing. “Companies and banks are busy repairing their balance sheets, and that suppresses borrowing appetite.”

Polk said that the solution requires both a “dramatic” reduction to interest rates combined with more government spending.

Economists say weak producer prices are of particular concern as commodity prices – a major deflationary force at China’s industrial heavyweights – are recovering yet producer prices remain depressed.

China cut interest rates for the third time in six months in May – on top of two reductions in the amount of money banks must keep in reserve, with little impact on deflation. Some economists believe China may be headed into a “liquidity trap” in which additional cash supply fails to translate into productive investment.

Reuters

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