China: Producer Prices Continue to Slide

Elliott Wave International has been keeping subscribers ahead of the deflationary forces that appear to be gaining momentum in China.

Here's an excerpt from the February 2019 Elliott Wave Financial Forecast:

The Big D Is Back in China

As we said last month, China remains the downside leader. These headlines suggest the onset of deflation.

Factory Deflation Looms in China (Bloomberg, January 7)

China Sluggish Prices Raise Deflation Fears (The Wall Street Journal, January 10)

And, the evidence for the onset of deflation continues.

Read this excerpt from a Sept. 9 Bloomberg article:

China Factory Deflation Deepens Signaling Worsening Economic Slowdown

China's producer price index fell further into contraction, signaling a worsening economic slowdown that threatens to add deflationary pressures to the global economy.

  • Factory prices fell 0.8% in August from a year earlier, compared with a decline of 0.9% in the median estimate of economists in a Bloomberg survey
  • The consumer price index rose 2.8% year-on-year, faster than the median estimate of 2.7%

Key Insights

  • The contraction in factory prices hurts manufacturers' pricing power and threatens disinflation to the rest of the global economy via exports. The central bank announced fresh easing measures last week including cuts to the amount of cash banks' hold as reserves, but economists said more stimulus is needed to boost demand
  • "The confluence of positive CPI and negative PPI will be especially felt by both firms and workers in some of the export-intensive sectors such as machinery and IT equipment," said Victor Shih a professor at the University of California in San Diego who studies China's politics and finance. "At a time when the trade war lessens these firms' pricing power, they are also under pressure to pay their workers more due to increasing food prices. This will lead to financial difficulties among some firms facing these pressures."

Read the free report, "What You Need to Know Now About Protecting Yourself from Deflation."