China witnessed an acceleration in the rate of inflation during June 2022; Partly driven by increased pork prices, however, it aims to widen the deficit to stimulate the economy.
Highest level of consumer prices in two years
The data of the National Bureau of Statistics on Saturday 9 July 2022 showed; Consumer prices grew 2.5% last month on an annual basis, topping economists’ expectations for a 2.4% increase. To be the strongest pace in two years, up from May’s rate of 2.1%, as reported by German news agency DPA.
Meanwhile, the Producer Price Index rose 6.1%, above the median forecast for a 6% increase in a Bloomberg survey of economists, albeit less than 6.4% in May.
And the agency “Bloomberg” indicated that “inflation data in China for the month of June indicates stagnant demand.” “Basic prices away from food and energy are hardly budging, indicating that zero-Covid restrictions continue to stifle spending on services,” she added. While growth in consumer prices is accelerating amid rising pork and energy costs, inflation is unlikely to become a crisis for the Chinese central bank similar to the one facing its Western counterparts, consumer demand remains low due to the strict control policies of the Covid-19 virus and the intermittent outbreak of the epidemic. in the country.
The government is moving to contain the rapid increase in the price of pork, a key product in China’s consumer price index basket, with measures including a study of selling pork from state reserves and requiring pig farmers not to hoard supplies.
The consensus now is that CPI will rise by 2.2% for the full year, well below the government’s target of keeping it around 3%, although some economists expect it to rise above that ceiling sometime in the second half of the year.
Expanding the budget deficit to support the economy
For his part, former Chinese Finance Minister Lu Jiwei said the country might consider increasing its budget deficit to provide more support for small businesses affected by the COVID-19 outbreak and weak consumption, according to Bloomberg News.
“The fiscal deficit in the budget of central and local governments can increase if necessary,” Lu Jiwei, who served as the finance ministry chief from 2013 to 2016, said at the summer Kaixin summit in Beijing.
The former finance minister said the central government might boost the transfer of payments to regional authorities to help them support small and micro businesses. He added that local governments might invest more in public projects.
Fiscal stimulus plays a more important role in the policy mix pursued by the Chinese authorities this year, at a time when local governments, in the world’s second largest economy, are facing declining revenues and greater expenditures on the restrictions to combat the Covid-19 disease.
And Bloomberg News reported this week that Beijing has asked local authorities to speed up the sale of special bonds to finance infrastructure projects and may allow them to sell in the second half of this year another 1.5 trillion yuan ($220 billion) worth of bonds for 2023.
Other options for China to fund the increased spending are to issue private sovereign bonds and ask state-owned companies or the central bank to remit more profits, Citigroup economists said in a note Friday, July 8, 2022.
The boosted fiscal deficit – a broad measure that covers the official budget deficit of 2.8 percent – is likely to widen by 3 percentage points, to 14.3 percent of the economy this year from 2021, according to Goldman Sachs forecasts.
The Chinese economy showed some early signs of improvement in June, as restrictions were eased as the outbreak of Covid-19 subsided. But the back-to-back data points to a contraction in the economy in the second quarter.
