China's consumer price index (CPI) rose 1.1% in June, while the PPI surged 8.8%, a slower growth compared May, according to the National Bureau of Statistics (NBS). The latest CPI indicated that the trend of rising inflation was ending, as CPI growth had been accelerating for four consecutive months since January. In May and April, the CPI rose 1.3% and 0.9% respectively. On a monthly basis, the CPI edged down by 0.4 percentage points in June. Dong Lijuan, Senior Statistician with the NBS, said the main reason for the CPI slowdown was the fall of food prices, particularly the pork price, which slumped by 36.5% in June, 12.7 percentage points more compared with the previous month. In general, China's food price has turned from 0.3% growth in May to a negative growth of 1.7% in June.
In comparison, China's producer price index (PPI) edged down by a slight 0.2 percentage points compared with May, which is in line with market expectations. Price increases slowed in a number of industries including chemical materials, oil and natural gas exploration as well as ferrous metal smelting. China's May factory gate prices have risen at the fastest annual pace in over 12 years due to surging commodity prices, and this worried many analysts, as higher commodity prices would reduce manufacturers' profits. PPI growth is likely to edge down further in the coming months, though the extent is hard to predict mainly due to uncertainties in the U.S. Fed policies as well as how the oil price would evolve. Inflation is expected to be under control in the second half of the year, said Wen Bin, Chief Researcher at China Minsheng Bank. China has set a 2021 CPI growth target of around 3%, compared with around 3.5% last year.
The People's Bank of China (PBOC) announced a cut of the required reserve ratio (RRR), the amount of cash that banks and financial institutions must hold as reserves, by 0.5 percentage points. The move is expected to release CNY1 trillion in long-term capital to consolidate the country's economic recovery and prevent risks in the second half of this year. The policy, effective from July 15, is the first RRR cut rolled out by the central bank in more than 15 months, and will be applied to all financial institutions except for banks that are subject to an RRR of 5%. The PBOC said that the RRR cut does not represent a change in its stable and normal monetary policy, but was intended to avoid a “flood-like stimulus.” “I expect the released capital to allow to expand loans to small and micro enterprises, which are facing multiple pressures including a rising yuan, a profit squeeze by bulk commodity price hikes, and the pandemic,” Wu Chaoming, Chief Economist at Chasing Securities, said. The central bank's pivot toward easing is based on expectations of a cooling economy in the third and fourth quarter, especially after a record-breaking 18.3% expansion in the first quarter, experts said. The RRR cut will save about CNY13 billion in costs for financial institutions annually, according to the PBOC statement.
