China's producer prices continue to tumble

BEIJING - China's producer prices continued to fall in July, pointing to looming deflation risk, data from the National Bureau of Statistics (NBS) showed on Sunday.

The producer price index (PPI), a measure of costs for goods at the factory gate, fell 5.4 percent year on year in July, widening from the 4.8 percent drop seen a month earlier.

The July reading dipped to the lowest level since the end of 2009 and marked the 41th straight month of decline.

Specifically, prices of production materials fell 6.9 percent, while those of consumer goods edged down 0.3 percent.

For the first seven months, PPI averaged at a 4.7 percent drop year on year. On a monthly basis, the index went down 0.7 percent in July.

NBS statistician Yu Qiumei attributed the PPI contraction mainly to dropping prices of industrial products and decreasing costs for oil and natural gas production.

"Domestic demand remained sluggish, and commodity prices were on the decline. China still faces grim deflation risk," noted Qu Hongbin, chief China economist at HSBC.

In a sign of weak demand, China's imports nosedived by 8.6 percent in July. A sharp decline of 8.9 percent in exports also cast a shadow on the world's second largest economy.

To make things worse, major commodity prices are lingering at multi-year low, and there are no signs of quick recovery.

The World Bank predicted that energy prices will average 39 percent below 2014 levels this year, with metal prices down 16 percent and iron ore plummeting 43 percent.

Peking University economist Su Jian believes weak commodity prices drive down the prices of finished products, which delays investment and postpone consumption. Weak demand caused by shrinking business activity will in turn sink commodity prices.

"To avoid such a vicious circle, we need more expansionary policies," said Su.