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China's Economy Stabilizes Modestly, Stimulus Hope Remains Alive

PART:
1 2 3 4
Part 3
China's Economy Stabilizes Modestly, Stimulus Hope Remains Alive PART 3 OF 4

China’s CPI Growth Slowed in July, PPI Continued to Fall

China’s CPI eased in July

In July, China’s CPI (consumer price index) grew at a slower pace to 1.8% YoY (year-over-year)—the slowest since January 2016—from a 1.9% rise recorded in the previous month. The drop in consumer inflation was attributed to lower food prices, especially vegetable prices. Heavy flooding in many parts of southern China wasn’t able to spike food prices in July.

Food prices added 3.3% in July—lower than the 4.6% rise in June. Pork prices rose by 16.1%—compared to a 30.1% jump in June.

The CPI also posted the third consecutive drop and remained well below China’s official target of ~3% this year. Weaker CPI data can allow for more stimulus from Chinese authorities to boost inflation and economic growth.

China’s CPI Growth Slowed in July, PPI Continued to Fall

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China’s PPI eased more in July

China’s PPI (producer price index) for manufactured goods fell 1.7% YoY in July—the lowest since September 2014. It was also slower than a 2.6% YoY drop recorded in June. However, it was the 53rd straight month of decline as China’s economic slowdown and industrial overcapacity weighed on prices. Industrial product prices won’t likely recover substantially as domestic demand and foreign demand remain weak.

On average from January to July, the PPI fell 3.6% YoY. As a result, subdued domestic inflation and deflationary pressure on China’s factories call for more easing from the People’s Bank of China.

Impact on funds

A soft reading on the CPI and PPI in July indicates that China’s economy is plagued with sluggish demand and deflation persists. The performance of funds such as the Clough China Fund – Class A (CHNAX), the Guinness Atkinson China and Hong Kong Fund (ICHKX), the Eaton Vance Greater China Growth Fund – Class A (EVCGX), the iShares MSCI China ETF (MCHI), and the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) could be impacted negatively.

The previously mentioned funds are invested in companies such as Jumei International (JMEI), Qunar CaymanIslands (QUNR), Ctrip.com International Limited (CTRP), NetEase (NTES), and JD.Com (JD).

In the next part, we’ll look at China’s foreign exchange reserves data.

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