DEFLATION RISK
The picture at factories was much worse. 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 41st straight month of decline.
"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 overall 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 largest goods trader.
To make things worse, major commodity prices are lingering at a 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 said weak commodity prices drive down the price of finished products, delaying investment and postponing consumption. Weak demand caused by shrinking business activity will in turn sink commodity prices.
"This will form a 'vicious circle,'" said Su.
CONTINUED EASING?
Worries have arisen that the central bank may tighten monetary conditions as the CPI recovers, but the bank hinted that it may not do so.
The central bank said in a quarterly report on Friday that China's inflation can be contained to a relatively low level.
The bank said it will employ multiple monetary policy tools to maintain "moderate" liquidity growth and try to lower financing costs so that the real economy can benefit from financial services.
"Although the Chinese economy is probably bottoming out, growth momentum is still anemic," said Zhang.
"It is unlikely that the central bank will deeply cut interest rates in the second half of the year, but it will not take actions to freeze liquidity, which is significant to bolster growth and stabilize the market," said Lian.
