- China’s factory-gate prices fell fastest in 7 years
- CPI remained unchanged from 0.2% gain last month
- Is it a concern?
Harare- China’s factory-gate prices recorded their fastest fall in seven and half years in June while consumer inflation was at its slowest since 2021. The producer price index marked its steepest decline since December 2015 year-on-year, falling for the ninth consecutive month by 5.4% from a 4.6% last month.
Data from the National Bureau of Statistics shows that the CPI remained unchanged year-on-year compared with the 0.2% gain last month driven by a faster fall in pork prices. That was the slowest pace since February 2021.
The fall in China's factory-gate prices to their lowest level in over seven-and-a-half years is an indication of weakened demand and overcapacity in the Chinese manufacturing sector. This is a concern for the Chinese economy, as it could lead to a slowdown in industrial production and a reduction in corporate profits, which could in turn impact economic growth.
The slower consumer inflation is another indication of weak demand and highlights the challenges faced by the Chinese government in stimulating consumption and boosting domestic demand. This could have a knock-on effect on global demand for Chinese goods and services, which could impact global economic growth.
China is the world's second-largest economy and a major contributor to global growth, so any slowdown in its economy could have a significant impact on the global economy as a whole. The fall in factory-gate prices and slower consumer inflation will likely add to the pressure on Chinese policymakers to use more stimulus measures to revive sluggish demand and support economic growth.
China's sluggish demand is a concern for global markets, only if it is extended and remains. China is the world's second-largest economy like I said and a major contributor to global growth, so any slowdown in its economy could have a significant impact on the global economy as a whole. China is also a major trading partner for many countries, and a decline in Chinese demand could lead to a reduction in demand for exports from other countries, which could impact global economic growth.
In addition, China is a major consumer of commodities, and a decline in Chinese demand could lead to a drop in commodity prices, which could impact commodity-exporting countries and companies. Thus, making it a concern.
How might the government respond
The Chinese government has several policy tools at its disposal to respond to the crisis of falling factory-gate prices. One possible response is to increase government spending on infrastructure and public works projects to stimulate demand and boost economic activity. The Chinese government has a history of using fiscal stimulus measures to support economic growth, and this is a likely option if the situation worsens.
In 2008, in response to the global financial crisis, the Chinese government implemented a massive stimulus package worth US$586 billion, which focused on infrastructure investment, tax cuts, and subsidies for domestic consumption. This stimulus package helped China maintain economic growth during a challenging period for the global economy.
During the property market crisis in 2014, the Chinese government implemented a series of measures which included easing lending restrictions for home buyers and providing subsidies for low-income housing. These measures were successful in stabilising the property market and supporting economic growth.
In 2019, the Chinese government implemented a series of tax cuts and other measures to support small and medium-sized enterprises (SMEs), which are a critical component of the Chinese economy. These measures included reducing the value-added tax (VAT) rate for certain industries and providing subsidies for research and development.
Another possible response is to use monetary policy tools, such as cutting interest rates or lowering reserve requirements for banks, to encourage lending and boost investment. The People's Bank of China has already implemented several monetary policy measures in response to the economic slowdown and may take further action if necessary.
In addition, the Chinese government could implement structural reforms to address overcapacity in the manufacturing sector, such as consolidating industries, reducing excess capacity, and promoting innovation and technological development. The government has already taken some steps in this direction, but more will likely be needed to address the underlying issues behind the current crisis.
The impact of the policies on the Chinese economy, currency, and stocks will depend on a variety of factors, including the extent to which the policies are implemented and their effectiveness in addressing the underlying issues in the economy.
If the policies are successful in stimulating demand and boosting economic activity, this could lead to an increase in economic growth and a positive impact on the Chinese stock market.
However, if the policies are not effective or are not implemented in a timely manner, this could lead to a further slowdown in the Chinese economy and a negative impact on the stock market.
Hence, the policies may have unintended consequences, such as asset bubbles, which could have a negative impact on the economy and the stock market.
Fate on Africa
Many African countries have strong economic ties with China, with China being a major trading partner and source of investment for many African nations. If the Chinese economy experiences a significant slowdown, this could lead to a reduction in demand for African exports and a decline in foreign investment from China, which could have a negative impact on African economies.
On the other hand, if the Chinese government's policies to address the factory-gate prices crisis are successful in stimulating demand and boosting economic growth, this could have a positive impact on African economies, as increased demand for Chinese goods and services could lead to an increase in demand for African exports as well.
Furthermore, Chinese investment in African infrastructure and development projects could also be impacted by the crisis. If Chinese economic growth slows significantly, this could lead to a reduction in Chinese investment in African infrastructure and development projects, which could hinder economic growth and development in Africa.
Russia is already feeling the impact of the Chinese industrial slump.
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