World Economy

China’s Factory Inflation Eases

China’s economy likely grew by a solid 6.8%  in the first quarter.China’s economy likely grew by a solid 6.8%  in the first quarter.

China’s producer price gains slowed last month from a peak in February, decelerating for the first time since September 2015 and tempering the global inflation outlook.

The producer price index rose 7.6% last month from a year earlier, compared with the median estimate of 7.5% in a Bloomberg survey and a 7.8% increase in February. The consumer price index rose 0.9% in March, compared with a 0.8% gain in February.

Slowing factory inflation may dent optimism about a recovery in global demand, and curb China’s contribution to worldwide reflation. The rebound in recent quarters had provided the government respite to rein in borrowing, tighten monetary policy, and cool a frenzy of speculation in the housing market.

“It looks like there’s a lot of inflation momentum at the producer level, which is good because they’ll have higher profits and more money to invest,” Dariusz Kowalczyk, a senior economist and strategist at Credit Agricole in Hong Kong, said in a Bloomberg Television interview. “It seems like PPI has peaked, it will remain fairly high in the second quarter and begin to slide in the second half of the year when base effects are out of the way.”

Producer prices fell month-on-month for the third time this year. The momentum of producer price hikes in key sectors has started easing.

 Q1 Growth Steady

China’s economy likely grew by a solid 6.8% in the first quarter, the same pace as the previous quarter, due to sustained government infrastructure spending and a gravity-defying housing market, according to a Reuters poll of 60 economists.

But the world’s second-largest economy is widely expected to lose steam later in the year as the impact of earlier stimulus measures starts to fade and as local authorities step up a battle to rein in red-hot housing prices.

A tighter monetary policy stance by the central bank and intensifying efforts by regulators to contain debt risks and asset bubbles could also weigh on growth in the world’s second-largest economy if not handled well, economists said.

“Growth is still driven by infrastructure investment and the property sector, but property investment is likely to slow in the second half due to curbs on home buying and mortgages,” said Tang Jianwei, economist at Bank of Communications in Shanghai.

“The economy is stabilizing and warming up, but there are still downside risks in the medium term.”

A surprisingly upbeat reading would likely boost stocks and global commodity prices, but a weak outcome could fuel the risk of more capital outflows, putting fresh pressure on the yuan currency.

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