China’s CPI weakens in June
In June, China’s consumer price index (or CPI) edged down to 1.9% year-over-year (or YoY) from the 2.0% rise recorded the previous month. The drop in consumer inflation was attributed to lower food prices, especially vegetable prices. However, the prices of meat and pork edged up. Weaker CPI data suggests more stimulus from the Chinese authorities to boost inflation and economic growth.
Food prices rose 4.6% YoY while non-food prices moved up by 1.2% in May. Pork prices rose sharply by 30.1% YoY, contributing to 0.7% of the CPI growth. The prices of meat went up by 19.2% YoY, contributing to 0.8% of the growth.
On average, from January to June, overall consumer prices were up by 2.1% YoY, while prices decreased 0.1% month-over-month in June. Inflation may rise temporarily in the coming months as food prices may soar due to heavy flooding in many parts of southern China, which may limit the supply of essential commodities.
China’s PPI eased further in June
China’s Producer Price Index (or PPI) for manufactured goods fell 2.6% YoY in June, compared with a 2.8% YoY drop recorded in May. That was the 52nd straight month of decline as China’s economic slowdown and industrial overcapacity weighed on prices. Industrial product prices are unlikely to recover substantially as domestic demand remains weak. The PPI may also see a temporary spike in prices due to massive flooding in many provinces of southern China.
The PPI increased 0.2% month-over-month in June. On average, from January to June, PPI decreased 3.9% YoY. Subdued domestic inflation and deflationary pressure on China’s factories call for further easing from the People’s Bank of China.
Impact on funds
The soft CPI and PPI readings in June indicate that China’s economy is plagued with sluggish demand and the risk of 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 adversely impacted.
The aforementioned funds are invested in companies such as Jumei International (JMEI), Qunar CaymanIslands Limited (QUNR), Ctrip.com International (CTRP), NetEase (NTES), and JD.com (JD). In the next part of this series, we’ll look at China’s industrial production.