China Records First Consumer Price Growth in Five Months Amid Deepening Producer Price Deflation

Official data released today, Wednesday 9th of July, by the Chinese National Bureau of Statistics showed a return to growth in the Consumer Price Index for the first time in five months, registering a slight increase of 0.1% in June compared to the previous year. This increase contradicted economists' expectations of price stability, according to a survey conducted by Reuters.

On the other hand, producer prices continued their sharp decline, with the index recording a 3.6% year-on-year decrease, the largest drop since July 2023, surpassing the expectations indicated in the Reuters survey of a 3.2% decline. This contraction comes amid continued pressures on the industrial sector since September 2022, driven by weak domestic demand and escalating price competition among companies.

The core Consumer Price Index, which excludes food and energy prices, rose by 0.7%, reaching its highest level in 14 months. Part of this improvement is attributed to the government's program to stimulate consumption through financial incentives for purchasing household appliances and electric cars, as explained by the economic expert Zhi Chun Huang from Capital Economics.

However, the overall economic landscape still faces significant challenges, as industrial company profits fell by 9.1% in May, marking the worst performance since last October. Chi Wei Chang, chief economists at PineBridge Investments, expressed pessimism about a rapid recovery, pointing to the continued weakness in the real estate sector and the beginning of the implementation of anti-monopoly measures ("Ni Guan").

In a related context, Chinese policymakers criticized aggressive pricing practices among companies during a high-level economic meeting last week, which aim to clear inventory but negatively impact their profits. An official newspaper quoted the meeting emphasizing the need to "direct companies towards improving product quality and gradually phasing out outdated production capacities".

On the other hand, some analysts like Larry Ho from Macquarie believe that a full recovery from the contraction will require stronger economic stimulus, especially with reduced government intervention probabilities given strong export performance, where exports rose by 4.8% in May and 8.1% in April.

While recent indicators point to some improvement, the Chinese economy still faces significant pressures due to production surpluses and weak global demand, keeping its economic future uncertain amidst escalating global trade tensions.