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How Did China’s CPI and PPI Move in May?

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China’s CPI weakens in May

In May, China’s CPI (or consumer price index) rose 2.0% year-over-year (or YoY), which was lower than the 2.3% rise recorded in the previous month. The rise in consumer inflation was attributed to higher food prices, particularly pork, along with higher cigarette and wine prices.

Food prices rose 5.9% YoY while non-food prices edged up 1.1% in May. Pork prices rose sharply by 33.6% YoY, contributing 0.8% of CPI growth while vegetable prices rose 6.4%, and accounted for 0.14% of CPI growth. Meanwhile, consumer prices fell 0.5% on a month-over-month basis in May.

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China’s PPI falls at a slower pace

China’s Producer Price Index (or PPI) for manufactured goods fell 2.8% YoY in May, lower than the 3.4% YoY drop recorded in April. The decline lowered in May due to improved aggregate demand in the industrial sector, extended gains in commodity prices, recovery in the construction sector, and increasing infrastructure and property investments during the period.

April’s PPI reading was the 51st straight month of decline as China’s economic slowdown and industrial overcapacity weighed on prices. The PPI increased 0.5% on a month-over-month basis in May.

Thus, subdued domestic inflation and deflationary pressure on China’s factories call for further easing from the People’s Bank of China (or PBoC). Meanwhile, in a mid-year working paper published on June 8, the PBoC economists raised their forecast for full-year CPI to 2.4% from 1.7%, citing increasing commodities and food costs, as well as higher rents stemming from surging home prices in some cities. However, they kept their PPI estimate unchanged for a decline of 1.8%.

Impact on funds

Modest CPI and PPI data in May indicates that China’s economy is on slightly firmer ground, and the risk of deflation has subsided a little bit. This news will have a positive impact on funds like 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).

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

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

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