China reaction: CPI stabilised after a bumpy Q1, while PPI remained sluggish

A partial recovery in April’s consumer prices

China's Consumer Price Index (CPI) inflation increased by 0.3% year-on-year in April (March: 0.1%), slightly surpassing market expectations of 0.2%. Core CPI, which excludes food and energy, rose by 0.7% in April, up from 0.6% in March. Although food prices declined by 2.7%, pork prices halted the downward trend by rising 1.4%. Non-food goods saw a 0.9% increase in April, up from 0.7% in March. While services CPI remained unchanged at 0.8% in April, consumer goods prices ceased their 12-month contraction, recording a 0.0% increase compared to -0.4% in March.

As the Lunar New Year-related seasonal effects wane, particularly strong this year due to the festival’s timing, consumer prices began to stabilise in April. Core CPI and non-food items showed slight recoveries, while food prices continued to decline. However, a positive development was observed in pork prices. The persistent decrease in sow pig stocks since July last year relieved oversupply pressures, leading to stabilisation in pork prices and the most significant price increase since April 2023, ending the drag on overall price levels. Furthermore, consumer goods prices halted their decline for the first time since March 2023, although due to significant negative wealth and income effects, coupled with insufficient policy support, consumer spending remained weak, particularly for big ticket items.

However, high-frequency holiday travel data from the five-day Labour Day holiday showed overall tourism revenue and tourist numbers exceeded 2019 levels, although per capita tourism expenditure dropped below 2019 levels after a brief increase during the Qingming Festival holiday period in March. On a positive note, Beijing recently shifted its policy focus towards the household sector, announcing car trade-in programmes to subsidise purchases of cleaner vehicles valid until the end of 2024. Such time-limited programmes could incentivise consumers to front-load consumption and boost consumer prices. Nonetheless, the economy still requires further progress in broad consumption to emerge from its low-inflation environment. We currently maintain our expectation for China’s CPI inflation at 0.6% yoy for 2024 on average.

PPI remained deflated, mixed conditions for domestic industrial demand

In April, the Producer Price Index (PPI) extended its deflationary trend for the 19^th consecutive month yet showing slight improvement. Headline PPI dropped by 2.5% yoy in April, an improvement from the 2.8% decline in March. Producer goods PPI decreased by 3.1% from -3.8% in March, while consumer goods PPI fell by 0.9% (March: -1.0%). Upstream industrial material prices showed varied performance, with PPI for non-ferrous metals smelting and pressing growing by 3.6% in April, while for ferrous metals, it fell by 8.5%. Downstream consumer sectors displayed mixed results, with PPI for building materials remaining in deep contraction -- falling by 7.8%, and clothing PPI growing by 0.3% in April.

April's PPI data presented a mixed picture, indicating a divergence between consumer goods and production goods. Generally, PPI for consumer goods outperformed those of producer goods, low-value consumer goods outperformed big-ticket goods, and PPI for property-related goods remained subdued due to the ongoing market correction. Overall, underperformers outweighed the outperformers, resulting in headline deflation. As consumer sentiment gradually improves and the property downturn persists, we anticipate this divergence in PPI to widen over the coming months. However, it may take several more months for the outperformers to turn the headline PPI positive.

Fiscal policy to carry on, while monetary policy easing could be delayed or weakened

April's inflation figures indicated some restoration of consumer sentiment, while the end of the property downturn is not yet in sight. Following the release of positive Q1 performance, concerns emerged regarding potential weakening in policy support. However, the 3^rd politburo meeting at the end of April alleviated such concerns, with Beijing’s policy stance remaining supportive and pragmatic. The Chinese Finance Ministry announced the issuance of ultra-long (tenor ranging from 20 to 50 years) central government bonds worth of RMB 1 trillion. We also expect a quicker pace of issuance of local government special bonds in the coming months, which could contribute to the growth of total social financing in the coming months.

On the monetary front, we maintain our forecast of a 50bps cut in the Required Reserve Ratio (RRR) rate, likely to be announced by the end of Q2 this year. However, considering the Fed’s signalling of delayed easing actions (with the first cut now expected in September) and tight Net Interest Margins (NIMs) among domestic banks, the People's Bank of China (PBoC) may deprioritise policy rate cuts this year.