The abating inflationary reading in China is signaling potential weakness in the world’s second-largest economy. In response, the government could increase stimulus measures to promote growth and potentially stir up related country-specific exchange traded funds.
The consumer price index increased a lower-than-expected 2.3% in June year-over-year, compared to average estimates for a 2.4% rise and down from 2.5% in May, Reuters reports. Meanwhile, the producer price index dropped 1.1%, its 28th consecutive month of declines, reflecting tepid demand in the domestic economy.
“The weak inflation data leaves more scope for Beijing to step up use of targeted measures and even opens the opportunity window for blanket easing policy, such as an interest-rate cut, to support economic growth,” Wang Jin, an analyst at Guotai Junan Securities, said in the article.
Economists anticipate the government will implement new stimulus measures in the months ahead to hit the target 7.5% growth target.
“Subdued inflation means monetary policy will have plenty of room to ease further over the coming months,” Julia R Wang, an economist at HSBC, said. “We think the central bank will likely continue to do so in a targeted manner, provided that economic activity continues to show improvement.”
Some observers are looking for aggressive steps like rate cuts or lower bank reserve requirements, while others believe Beijing will continue with its micro stimulus measures.