China’s inflation data has elicited a reaction.

China's inflation data has elicited a reaction.

China’s Consumer Prices Experience First Annual Decline in Over Two Years


Beijing, Aug 9 – China’s consumer prices have seen their first annual decline in more than two years in July, while factory gate prices continue to fall, as lackluster demand weighs on the economy. Several analysts have commented on the inflation data and provided their insights on the issue.

A Worrying Outlook for CPI and PPI

According to Xing Zhaopeng, a senior China strategist at ANZ Shanghai, both the CPI and PPI have fallen into negative territory, confirming economic deflation. However, there is a glimmer of hope as the core CPI has rebounded to 0.8% due to seasonal tourism during the summer. Unfortunately, Xing Zhaopeng doubts the sustainability of this rebound. Given the high base from last year, it is expected that the CPI will hardly rebound significantly in the second half of the year. It is likely to hover around 0, making it difficult to maneuver monetary policy. The recent call for a stable yuan exchange rate from the Politburo meeting could potentially conflict with monetary easing efforts.

Impact of Food and Services on CPI and PPI

Tao Chuan, chief macro analyst at Soochow Securities Beijing, points out that this is the fifth time that CPI has fallen in year-on-year terms since the reform and opening-up. The decline is largely driven by the month-on-month and year-on-year decrease in food prices. However, the service sector presents a bright spot as it turned positive on a month-on-month basis, increasing by 0.8%. Tao Chuan expects that with destocking and credit expansion, both the PPI and CPI will rebound from the bottom in the fourth quarter. The recent intensive stimulus measures launched by China after the July Politburo meeting will take time to reflect. Tao Chuan suggests that the central bank may cut interest rates by another 10bp in the remaining months of the year. He believes that while the economy is recovering, it won’t take long for the data to bottom out.

Need for Actionable Support Measures

Frances Cheung, rates strategist at OCBC Bank in Singapore, emphasizes the need for actionable support measures from the Chinese authorities to maintain a positive market sentiment. While there is room for some mild monetary policy easing, the onus is primarily on the fiscal side. Cheung suggests that economic data showing growth improvement is necessary, but currently missing from the equation.

Deflationary Factors and the Potential for Rate Cuts

Hu Yuexiao, chief analyst at Shanghai Securities, clarifies that the CPI’s negative territory in July was expected. This deflation does not imply cyclical sluggishness, but rather a statistical shrinkage. Key indicators like pork prices remain low due to structural changes, and commodity prices are soft due to non-economic factors. With negative CPI and PPI, there is room for rate and RRR cuts later this year, which could potentially benefit the capital market. Zhiwei Zhang, president and chief analyst at Pinpoint Asset Management in Hong Kong, also highlights the deflationary nature of both CPI and PPI. He mentions that lackluster domestic demand and weakened economic momentum are the main contributors to China’s current economic challenges. Zhang expects the government to consider additional fiscal stimulus to mitigate the consequences of CPI deflation.

The Impact of Pandemic and Uncertainty on Consumer Inflation

Marco Sun, chief financial market analyst at MUFG Bank (China) in Shanghai, sheds light on the factors affecting consumer inflation in year-on-year terms. The pandemic’s impact last year, combined with uncertainties surrounding the pace of macroeconomic recovery, contributed to the current year-on-year drop in CPI in July. Sun predicts that China will further reduce policy rates in the second half of the year. Such monetary easing could promote recovery on the supply side and stabilize the demand side.

Weak Demand and Revenge Consumption

Xia Chun, chief analyst at Yintech Investment Holdings in Hong Kong, highlights that the lower inflation data reflects weak demand in mainland China, which remains the biggest challenge for the country’s economy. While other countries and areas experience revenge consumption after COVID lockdowns are lifted, mainland China is witnessing the opposite phenomenon—revenge deposit. Deflation is expected to persist for six to twelve months. Nevertheless, Chun believes that China will not follow the path of Japan, where deflation has been severe and has persisted for half of the past two decades.

Divergence between Manufacturing and Services

Gary Ng, Asia Pacific Senior Analyst at Natixis, emphasizes that although the headline CPI and PPI suggest a deflationary story, the pressure is not as significant as it is mainly driven by lower food, energy, and commodity prices. Ng points out the increasing divergence between the manufacturing and services sectors in China. This indicates that the economy will grow at two different speeds in the rest of 2023, especially considering the re-emergence of problems in the real estate sector. It also demonstrates that China’s economic rebound is not as strong as expected to compensate for weaker global demand and lift commodity prices.

In conclusion, China’s consumer prices have experienced their first annual decline in over two years. While there are bright spots in certain sectors like services, the overall outlook remains concerning. The Chinese authorities will need to implement actionable support measures to stimulate the economy and counter deflationary pressures. Monetary policy easing, fiscal support, and improved economic data are crucial in boosting growth and stabilizing inflation.