China’s central bank says consumer prices will likely drop in July

BEIJING – China’s consumer prices will likely decline in July before recovering, Liu Guoqiang, deputy governor of the People’s Bank of China, told reporters Friday.

Official measures of consumer prices have barely changed in the last several months amid tepid demand, in contrast to high inflation in the U.S. and Europe.

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“This year CPI’s year-on-year growth has softened, and July may see a decline,” Liu said. He claimed the drop was only a “phase” due to the recovery of demand and base effects.

“At this time there is no deflation, and there will be no risk of deflation in the second half of the year,” he said, pointing to factors such as China’s economic recovery and growth in money supply.

New bank loans for June grew by more than analysts polled by Reuters had expected.

The central bank said in April consumer prices would likely see a “U-shaped” recovery this year.

Liu reiterated that forecast on Friday, and said he expected consumer price increases could near 1% by the end of the year.

China on Monday reported no change in consumer prices for June from a year ago. Excluding food and energy, consumer prices rose by 0.4% from a year ago.

Taking 0% CPI with a market benchmark lending rate of 3.55%, China’s real interest rate is above 3%, Bruce Pang, chief economist and head of research for Greater China at JLL, pointed out.

In contrast, the real U.S. interest rate is roughly 0.5% given its approximately 4.5% core inflation and lending rate of above 5%, he said.

“So China should actually cut rates,” he said, noting that if prices turned deflationary the net effect would be that of a rate hike.

China’s economic recovery from the pandemic has stalled in recent months, with lackluster retail sales, the continued overhang of the property market slump and plunging exports. The country is set to report second-quarter GDP on Monday.

“The policies we have announced are currently taking effect,” the PBOC’s Liu said on Friday. “We need to have patience and confidence regarding the economy’s stable growth.”

He noted expectations it will take a year for China’s economy to recover.

China has set a GDP target of around 5% for the year, lower than most institutions’ current forecasts.

Beijing is reluctant to embark on another round of large-scale stimulus. Debt levels have soared, especially for local governments whose ability to repay the debt has diminished.