China reaction: Stability in CPI, easing in PPI, contrast in demand

Consumer prices stabilised, but not yet reflated

China's Consumer Price Index (CPI) inflation grew by 0.3% yoy (April: 0.3%), slightly lower than expected (BBG: 0.4%; AXA IM: 0.3%). Core CPI inflation, which excludes food and energy, eased to 0.6% in May, from 0.7% in April. Thanks to the continued cyclical rebound in pork prices, which rose by 4.6% yoy in May, the decline in food prices narrowed to -2.0% from -2.7% in April. Prices for services and consumer goods remained stable since April, rising by 0.8% and 0.0%, respectively. Tourism prices edged up to 4.2% yoy from 4.1% in April. Automobile prices contracted by 4.7% yoy, with electric vehicle (EV) prices dropping by 6.9% and prices for internal combustion engine (ICE) cars declining by 5.2%. In comparison, overall car sales declined by 1.9% yoy in May, but EV sales grew by 38.5%.

May’s CPI print came in in line with our expectation. Although the five-day Labour Day holiday at the beginning of May saw good performance in tourism and services, it failed to reflate prices, highlighting the trend of consumer downgrades as consumers replace usual purchases with cheaper substitutes. However, producers also account for weak prices in the economy. This was particularly evident with car makers competing for consumers with more attractive prices, resulting in falling automobile prices and more sales in EVs with faster falling prices, even with the recent support from the trade-in programme for EVs, which has led to robust sales in May.

Overall, this month’s release underscored weak prices generally, despite robust demand in some sectors, evident in tourism and EV sectors. It suggests a weak consumer backdrop overall, resulting from a gloomy labour market and property downturn. More importantly, it also highlights the downward pressure on prices as producers continue to lower prices to boost sales which threatens producer profitability. This could create pressures for lower wages, which would worsen the consumer cycle further. It is therefore necessary to break this negative feedback loop to reflate the economy meaningfully.

PPI deflation eased as momentum improves

In May, the Producer Price Index (PPI) narrowed its deflation. Headline PPI eased to -1.4% yoy, from a 2.5% decline in April. Producer goods PPI decreased by 1.6% from -3.1% in April, while consumer goods PPI fell by 0.8% (April: -0.9%). Upstream industrial material prices improved significantly, with PPI for non-ferrous metals mining increasing by 13.5% in May, and prices for smelting and pressing grew by 8.9%. PPI for building materials extended its decline, falling by 8.8% in May from -7.8% in April.

As expected, PPI continued to improve in May, benefitting from the rising trend in global commodity prices for non-ferrous metals and the favourable base effect. PPI is expected to continue its recovery, yet it is unlikely to reverse the deflationary trend this year.

Support in property sector still not impacting

May’s inflation figures brought little surprise overall but highlighted the income and wealth impact from labour market and property market corrections. The wealth impact from the property downturn is likely to continue to act as a drag for longer as Beijing’s support measures have so far failed to show a strong impact on stabilising the market. We expect CPI to grow by 0.6% on average in 2024.