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China's Inflation Is Stable, Keeping The Demand For Further Stimulus High

China's Inflation Is Stable, Keeping The Demand For Further Stimulus High
While production price drops abated in May, China's consumer inflation remained stable. However, the underlying pattern indicates Beijing would need to take further action to support weak domestic demand and an uneven economic rebound.
Despite many rounds of support measures, weak demand in China has held consumer prices in check since 2023 as confidence is still low due to a protracted crisis in the property sector. According to economists, in order to increase demand in a sustainable manner, more robust and well-coordinated fiscal and monetary stimulus measures are needed.
The National Bureau of Statistics (NBS) said on Wednesday that the consumer price index (CPI) increased by 0.3% in May compared to a year earlier, mirroring a gain in April. This was less than the 0.4% increase predicted in a Reuters survey.
After falling 2.5% in April, producer prices—which had been in a state of deflation since September 2022—fell at a slower rate of 1.4% in May, in contrast to a 1.5% decrease that was predicted.
"I think the deflationary pressure has not faded yet," said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
"The improvement in PPI is largely driven by commodity prices such as copper and gold, which is not a reflection of China’s domestic demand," he said.
Zhang's opinion was supported by the dismal month-over-month CPI gauge, which decreased by 0.1% compared to an increase of 0.1% in April and fell short of experts' predictions of zero growth.
Following the data, China's blue chips saw a modest decline at the lunch break, but Asian equities remained muted.
"For investors, the key question is whether China's PPI inflation could turn positive in the second half of this year, given the recent rise in commodity prices, particularly copper," said Zhou Hao, chief economist at Guotai Junan International.
"Overall, today's inflation report suggests that a moderate reflation is still ongoing, while a low inflation is likely to remain the base case," Zhou added.
Even after the strict COVID restrictions ended in late 2022, China's economy has failed to grow, mostly as a result of the negative consequences of a protracted property sector crisis on investor, corporate, and consumer confidence.
Beijing has implemented a number of initiatives to increase demand in the housing market and other programmes to improve consumer confidence, such as government-funded incentives to encourage trade-ins of cars and other consumer items.
In addition, it has promised to implement policies to support youth-oriented domestic demand, increase employment opportunities associated with large-scale projects, and provide fiscal stimulus to support growth.
The difficulty Beijing faces in increasing domestic demand was highlighted by statistics released on Wednesday on the core inflation measure, which does not include volatile food and energy costs. The gauge decreased from 0.7% in April to 0.6% in May when compared year over year.
The consumer inflation resurgence is expected to be "very modest" due to ongoing industrial overcapacity, according to Zichun Huang, the China economist at Capital Economics, who projects it to average 0.5% rate this year.
Many analysts predict Beijing will announce further support measures in the upcoming months to ensure the economy stays on course to meet its "around" 5% GDP growth target for this year and to promote a long-lasting recovery.
Most, however, agree that in order to restore trust and encourage consumers and companies to start spending again, the government must implement a complete package of fiscal and monetary policies.
For example, markets and investors generally view the unprecedented steps taken last month to stabilise the struggling real estate market as inadequate.
"A more comprehensive and proactive policy stance covering fiscal, monetary, and property sector may be necessary to boost domestic demand more effectively," Pinpoint's Zhang said.

Christopher J. Mitchell

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