China's Inflation Muted In July, Makes Way For Stimulus, Rate Cut Hopes

China’s annual consumer inflation remained subdued in July while the producer price index, or PPI, fell for 17 straight months, official data released on Friday showed, giving the country’s central bank more room for monetary stimulus, if growth slows further in the world’s second-largest economy.

Data released by the National Bureau of Statistics showed that the consumer price inflation index, or CPI, rose 2.7 percent from a year-ago period in July and remained unchanged from June levels. Producer prices fell by 2.3 percent in July, after falling 2.7 percent in the previous month, marking the longest stretch of deflation by this measure since 2002.

Analysts polled by Reuters had expected the CPI to increase by 2.8 percent and producer prices to fall by 2.2 percent in July. Economists believe that tamer inflation could help the central bank to ease monetary policy to prop up the economy, which is set to grow at its slowest pace in more than two decades.

“The muted inflation reading will provide necessary room for implementing a mini fiscal stimulus and avoiding monetary tightening,” Lu Ting, Bank of America’s head of Greater China economics in Hong Kong, said in a note, Bloomberg News reported. “Improving investment demand and inventory restocking” may help the producer price index turn positive on a month-on-month basis in the coming months, Lu said.

However, some economists feel that the central bank, which sounded hawkish in its last monetary statement, would wait for more signs of stability in inflation and growth, before rolling out stimulus measures or easing monetary policy.

Economists believe that subdued inflation and persisting deflation seen in the producer price index reflect Beijing’s efforts to remodel the economy on a domestic consumer-driven model.

China had launched a slew of measures -- such as asking hundreds of companies in its manufacturing and infrastructure-related sectors to scale down excess capacity, and announced measures to encourage smaller companies -- in a bid to guide its economy away from credit-fuelled and investment-oriented growth to a long-term sustainable model based on domestic consumption.

“It seems that the government’s campaign to deflate a potential housing bubble is having an effect. House-price growth is cooling, and this is reducing demand for furniture, electronics and other household goods,” Alaistair Chan, an economist at Moody’s Analytics, told MarketWatch.

The surprisingly strong trade data released on Thursday also had signaled that China’s economy is moving toward stabilization and the Chinese government’s efforts to improve domestic consumption has begun to show positive results. According to data released by China’s customs administration, the country’s exports rose 5.1 percent in July from a year earlier, while imports grew by 10.9 percent.

Hong Kong shares gained following the release of the inflation data with the Hang Seng index rising 0.33 percent. The Shanghai Composite index lost more than 0.6 percent in choppy trade.