China PPI drop highlights plight of real economy

China's producer price index (PPI), a main gauge of inflation at the wholesale level, fell 2.9 percent in July from a year earlier, the National Bureau of Statistics (NBS) announced on Thursday.

The data marked the fifth straight month of decline after China's PPI saw a drop in March for the first time since December 2009, NBS data showed.

On a month-on-month basis, the country's PPI for July moved down 0.8 percent, the NBS said in a statement on its website.

In July, producer purchase prices shed 3.4 percent year on year and 0.8 percent on a monthly basis, the NBS said.

In the first seven months of the year, the PPI went down one percent year on year, while producer purchase prices lost 0.8 percent, it said.

The NBS also announced Thursday that China's consumer price index (CPI), a key gauge of inflation, grew 1.8 percent year on year in July, the slowest pace since February 2010.

Qu Hongbin, chief economist at HSBC China and co-head of Asian Economic Research at HSBC, said the data suggests that China's real economy, especially industrial enterprises, are facing increasing deflationary pressure.

"The decline of the PPI has highlighted the grim facts of sluggish market demand, shrinking business orders and continuing destocking," he said.

Liu Yuhui, a researcher with the Chinese Academy of Social Sciences, said weak demand will be followed by narrower profits, which will in turn affect investment and employment.

"Policymakers should place more attention on downward pressure in the real economy," Qu said, adding that easing inflation will offer more room for policy fine-tuning.

In a report released last Sunday, the central bank said it will strengthen the fine-tuning of its monetary policy in the second half of the year and improve its credit policies to shore up the development of the real economy.