China Deflation Risks Intensify as Trade Data Weakens; Hang Seng Index Gains

China Consumer and Producer Prices Diverge

China’s battle with deflation took center stage as consumer and producer prices diverged, amplifying concerns over waning domestic demand and weakening export momentum. With US tariffs biting harder and trade data flashing red, Beijing faces mounting pressure to deliver fresh stimulus to bolster the economy.

Consumer prices fell 0.4% year-on-year (YoY) in August after stalling in July, missing forecasts. Economists had expected consumer prices to drop 0.2%. With prices flat MoM, the 0.4% YoY fall underscored persistent deflationary pressures.

Rising unemployment and low consumer confidence have affected consumption, raising deflationary pressures. China’s real estate troubles and weak demand for credit have also fueled household’s caution in spending.

While consumer prices fell sharply YoY, producer price declines slowed, hinting at potential stabilization. Producer prices declined 2.9% YoY in August, the rate of decline slowing from a 3.6% slide in July. Economists expected producer prices to fall 2.9%.

 

Producer Prices and Manufacturing PMIs – Mixed Signals

August’s price trends aligned with China’s manufacturing sector’s PMI data. The RatingDog Manufacturing PMI increased from 49.5 in July to 50.5 in August. Notably, new order growth rose at the most marked pace since March. The pickup in demand eased price pressures, snapping an eight-month decline in average selling prices.

Why do traders need to worry about producer prices?

Producers typically adjust prices in response to demand. Weak demand could lead to lower prices and greater cost savings for consumers. On the other hand, producers may raise prices if demand improving, passing higher costs on to consumers.

Exports Slow, Pointing to Rising Deflationary Pressures

While the Manufacturing PMI signaled improving demand, China’s trade data painted a gloomier picture. Exports rose 4.4% YoY in August, down from 7.2% in July, marking a sharp loss in momentum and signaling weakening external demand. Notably, Chinese shipments to the US plunged 33%.

Weakening external demand could intensify competition. Rising competition may fuel price wars, passing cost savings on to consumers.

A US-China trade agreement with reduced or removed tariffs could change the narrative. Given China’s new trade routes, increased US demand for Chinese goods could refuel inflationary pressures. However, rising US-China friction and higher US levies on direct Chinese shipments and transshipments may drive deflationary pressures.

Market Outlook: Beijing Stimulus and Looming Data

While China’s inflation, PMI, and export data will influence sentiment, Beijing’s stimulus pledges could cushion the effect of weak numbers. Policy measures targeting the housing market, unemployment, and domestic consumption may lift demand.

Meanwhile, upcoming Chinese economic data will provide traders and Beijing with further insights into the demand environment. Retail sales, industrial production, and unemployment figures for August will face scrutiny on Monday, September 15. Weaker data may pressure Beijing into rolling out fresh stimulus ahead of this month’s Politburo meeting.

Hopes of further stimulus tempered the impact of the CPI and PPI data on Mainland China and Hong Kong equity markets.

The Hang Seng Index rose 0.60% to 26,094 in morning trading after hitting an early high of 26,129. Meanwhile, Mainland China’s CSI 300 gained 0.05%, while the Shanghai Composite Index slipped 0.02%.

Discover strategies to navigate this week’s market trends here.