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China’s economy teetered on the brink of recession in June, adding to calls for Beijing to launch a stronger stimulus package to sustain the country’s faltering post-Covid recovery.
The consumer price index was flat year over year and fell 0.2 percent from the previous month, while factory gate prices fell at the fastest pace since 2016 as demand for consumer and manufactured products slumped.
Analysts expected the figures to lead China’s central bank, the People’s Bank of China, to cut interest rates again, adding to last month’s round of cuts that many believe Beijing will have to supplement with fiscal stimulus policies.
“China is still growing — the question is whether it will hit its target,” said Heron Lim, economist at Moody’s Analytics. “In terms of that recovery, it’s still there, but the concern is that it’s slowing down.”
China is targeting 5 percent GDP growth this year as the economy emerges from strict Covid-19 controls, but the recovery has become fragile, with real estate prices and exports falling.
Consumption is still growing, but there are concerns that the government will have to do more to sustain the recovery as global economic growth slows, reducing demand for China’s exports.
The economic weakness comes as Beijing tries to de-escalate tensions with the United States, which many blame for lack of investor confidence in China after a series of tit-for-tat sanctions.
US Treasury Secretary Janet Yellen sought during a weekend visit to Beijing to reassure her hosts, including China’s number two official, Premier Li Qiang, that the United States is not seeking a sweeping economic decoupling.
The decline in the consumer price index came below analysts’ expectations in a Reuters poll for a rise of 0.2 percent.
The producer price index fell 5.4 percent from the same period last year, accelerating from a 4.6 percent drop in May and faster than the 5 percent decline expected by analysts polled by Reuters.
Goldman Sachs analysts said the decline was partly due to weak commodity prices and continued price cuts due to China’s “618” online shopping festival in the middle of the year.
Food price inflation rose in June, partly due to higher vegetable prices, which increased 10.8 percent year-on-year, compared to a 1.7 percent decline in May.
But pork prices were lower on weaker demand, falling 7.2 percent year-on-year in June.
“The very low inflation reading supports our view that the People’s Bank of China is likely to implement two more rounds of interest rate cuts,” Nomura economists wrote in a research note.
They added that the central bank may also seek to release more liquidity into the system by further lowering the reserve requirement ratio, which requires banks to hold a certain level of funds as a precautionary measure.
Moody’s Lim said few were expecting a bazooka-style stimulus. “Despite the fact that the economy is quite close to contracting, the People’s Bank of China (PBoC) does not appear to be looking at monetary stimulus of the kind that the US Federal Reserve or the European Central Bank would do.”
The weak economic performance comes as Chinese economists urge the government to shift from its traditional form of stimulus – investing in big-ticket infrastructure projects – to targeting consumers.
“This can directly correspond to our actual economic handicaps and shortcomings,” said Cai Fang, chief economist of the state-run Chinese Academy of Social Sciences, according to a transcript of a business forum published by Chinese news site Caijing.
The Chinese yuan inside opened at 7.2256 renminbi per dollar and was 7.2339 renminbi at midday, slightly weaker than the previous session’s late close, Reuters reported.
Additional reporting by Sun Yu in Beijing