China deflation fears add to growth concerns; Wall Street downgrades

Fears are rising that China’s economic system is tethering on the verge of deflation after one other slate of underwhelming financial knowledge supplied extra proof of stagnating development, renewing requires extra significant coverage intervention.

On Monday, Beijing introduced that GDP for the second quarter grew 6.3% from a 12 months in the past, lacking market expectations for 7.3%. This additionally marked a 0.8% development from the primary quarter, slower than the two.2% quarter-on-quarter tempo recorded within the first three months of the 12 months.

“We have to see broad and chronic worth strain earlier than we will declare deflation,” stated Hong Hao, Develop Funding Group’s chief economist. “That is taking place within the upstream sectors and it usually takes two to 4 quarters to move down.”

“I feel we’re on the verge of deflation. Now it is the time to behave to stem the deflationary strain,” he added.

Hong pointed to official knowledge final week exhibiting that China’s producer costs fell 5.4% in June from a 12 months earlier and slipped 0.8% from a month in the past — falling under analysts’ expectations. The annual decline in June was China’s ninth consecutive drop and its steepest since December 2015.

Annual shopper worth inflation was flat in June — pushed by a 7.2% drop in pork costs — lacking Reuters’ expectations for a 0.2% rise and weaker than the 0.2% rise in Might. 

The Folks’s Financial institution of China pushed again on the deflation thesis final week.

“Right now there isn’t any deflation, and there might be no threat of deflation within the second half of the 12 months,” Liu Guoqiang, deputy governor of the PBOC, advised reporters final week. He pointed to elements reminiscent of China’s financial restoration and development in cash provide.

Chinese language banks prolonged 1.81 trillion yuan ($258.23 billion) in new yuan loans in June, up 22% from Might.

Nonetheless, some economists are pointing to different indicators.

“Nominal GDP development seems to be decrease than actual GDP development in Q2, the primary time since comparable knowledge can be found in This autumn 2016,” stated Zhang Zhiwei, Pinpoint Asset Administration’s president and chief economist. “This means that threat of deflation is severe.”

Nominal gross home product measures financial exercise with out adjustment for inflation.

Economists at Citi and Macquarie additionally flagged the danger of sagging costs on this planet’s second-largest economic system following Monday’s launch.

Nevertheless, Macquarie economists Larry Hu and Yuxiao Zhang characterised the situation in China as disinflation — a brief slowdown of rising costs — reasonably than deflation, which refers to a extra significant issue the place there is a persistent lower in costs over time.

“Disinflation strain is obvious, as nominal GDP development slowed to 4.8% 12 months on 12 months in 2Q from 5.0% in 1Q. It is the primary time for the reason that second quarter of 2020 that the GDP deflator has turned adverse,” Hu and Zhang wrote of their evaluation of Monday’s knowledge launch.

A raft of different June knowledge have pointed to a weak prognosis. Despite the fact that top-line fastened asset funding and industrial output figures marginally exceeded market expectations, there was a worrying deepening decline in property funding.

Even with a low base from final 12 months, given the Covid lockdown in Shanghai, retail gross sales slowed to three.1% in June from a 12 months earlier than, in comparison with 12.7% in Might.

Monday’s disappointing knowledge triggered one other slew of downgrades by Wall Avenue banks, together with Barclays, Citi, Morgan Stanley and JP Morgan.

Economists reduce their forecast for China’s annual development, underscoring the depth of the exuberance on China’s financial restoration when it emerged from strict zero Covid curbs late final 12 months.

Citi, Morgan Stanley and JP Morgan now count on China’s annual development print this 12 months to return in at 5%, whereas Barclays trimmed its forecast from 5.3% to 4.9%.

— CNBC’s Evelyn Cheng contributed to this report.