China’s consumer price growth in May was lower than expected, with industrial producer prices falling for the 20th consecutive month, indicating that China’s current stimulus measures are ineffective and domestic demand remains weak.
The Chinese National Bureau of Statistics announced on Wednesday (June 12th) that the Consumer Price Index (CPI) rose by 0.3% in May, marking the fourth consecutive month hovering above zero, but lower than the economists’ expected median of 0.4%. The Producer Price Index (PPI) for industrial producers continued its contraction that began at the end of 2022.
The sluggish prices have intensified calls for authorities to stimulate demand. After excluding the volatile food and energy prices, core inflation rose by 0.6%. Following a 2.5% decline in April, PPI slightly improved in May, dropping by 1.4% year-on-year, mainly due to the rise in commodity prices.
Zhiwei Zhang, Chief Economist at Pinpoint Asset Management, expressed that “inflationary pressures have not yet dissipated.” “The improvement in PPI is mainly driven by the rising prices of commodities such as copper and gold, not a reflection of improving domestic demand in China,” Zhang added.
He pointed out that the month-on-month CPI in May decreased by 0.1%, supporting this view. “To effectively boost domestic demand, (the Beijing authorities) may need to adopt more comprehensive and proactive policies covering fiscal, monetary, and real estate sectors,” Zhang suggested.
Despite the strict “zero-COVID” measures ending at the end of 2022, China’s economy continues to struggle to recover, mainly due to the prolonged real estate crisis that has dampened confidence among investors, businesses, and consumers.
Amid a prolonged slump in the real estate sector and a gloomy job market, Beijing has been striving to stimulate household spending growth. However, as of January this year, China has been facing its longest continuous period of deflation since the 2008 global financial crisis.
The decline in PPI has squeezed business profits, making them reluctant to invest. Moreover, consumers may be less willing to spend as they anticipate future goods becoming cheaper.
Economist David Qu from Bloomberg Economics stated, “Another month of soft consumer price data clearly indicates the need for more stimulus measures to boost domestic demand in China.”
Chinese industrial enterprises have long been facing the dilemma of slowing profit growth. Meanwhile, foreign governments have continuously criticized Chinese policies for leading to overcapacity, with industries like battery manufacturing, electric cars, and solar panels embroiled in fierce price competition.
Raymond Yeung, Chief China Economist at ANZ, mentioned that the Chinese authorities may take measures to curb overcapacity to address these concerns, which could help alleviate PPI deflation.
“But we believe that the key to addressing downward price pressures lies in revitalizing domestic demand,” Yeung said. “Due to the persistent real estate crisis, low inflation seems to have become the norm.”
Economists surveyed by Bloomberg expect China’s consumer prices to rise by 0.7% this year, far from the official target of 3%.