Prices Tumble Across the Chinese Economy

 

HONG KONG — Prices are tumbling across the Chinese economy, according to government data released on Monday, as a flood of goods pouring out of the nation’s vast and ever-expanding factory cities exceeds anemic demand from Chinese households and businesses.

Consumer prices dropped 0.6 percent in June compared with May, the largest month-to-month drop in two years. Consumer prices were still up 2.2 percent from a year ago, but only because prices kept rising fairly briskly through January of this year before beginning what has now become an accelerating descent.

Producer prices, measured at the factory gate, were down 2.1 percent in June compared to a year earlier, and down 0.7 percent in June compared to May. These prices had started to weaken late last summer, about six months before consumer prices began eroding.

“Today’s inflation data show that deflation could become a larger concern for China than inflation,” said Ren Xianfeng, a China economist at IHS, a global consulting company.

Falling prices, or deflation, can be as much of a challenge for economic policymakers as inflation. During deflation, businesses struggle to sell enough goods to repay loans that they took out usually on the expectation of rising prices.

Managers at companies across China complain of having to cut prices for their wares even as labor costs continue climbing.

“Business is slower and more challenging this year compared to the same period last year. I would say prices are down overall by 5 percent this year,” said Elaine Yan, the manager of the import and export department at the Wuxi Zontai International Corporation, a trading company in Wuxi, China, that sells leather gloves, handbags, scissors and embroidery.

Companies are saving money on raw materials, however, as the global boom in commodity prices has swung into reverse in recent weeks.

Chinese economic policymakers did little to respond to the country’s slowing economy from mid-March to mid-May. That period happened to coincide with a factional struggle, as a prominent member of the Communist Party, Bo Xilai, was removed as party secretary of Chongqing in March and suspended from the Politburo in April.

But the country’s leadership now seems to be reacting with policies aimed at offsetting the economic slowdown. Premier Wen Jiabao did an inspection tour of east-central China over the weekend and called for more aggressive fiscal and monetary policies . China’s central bank has cut interest rates twice in the past month.