China Inflation, Tariffs, Price Wars Cloud Outlook; Hang Seng Dips on Proxy Trade War Risk

China Inflationary Pressures Return as US Eyes Transshipments from Asia

Rising tariffs and falling factory prices reignite deflation concerns in China. China’s economy was in the spotlight as the US administration targeted attempts to bypass US tariffs. Inflation and producer price trends sent mixed signals, but underscored a weakening demand environment and intensifying pricing pressures.

Consumer prices rose 0.1% year-on-year (YoY) in June after declining 0.1% in May but dropped 0.1% month-on-month. Producer prices painted a gloomier demand picture, falling 3.6% YoY in June, following a 3.3% YoY drop in May.

Price trends in June aligned with the Caixin Composite PMI figures, where weakening overseas demand fueled domestic competition and price wars. Price wars could further impact company profits, consumer sentiment, the labor market, and domestic spending.

Market Reaction to China’s Inflation Report

The Hang Seng Index dropped to a low of 23,975 at the open. Tariff tensions and trade headlines contributed to the pullback, leaving the Index down 0.70% at 23,977.

In the forex market, the AUD/USD climbed to a pre-inflation report high of $0.65311 before dropping to a low of $0.65192. However, in response to the data, the pair fell to a low of $0.65252 before rebounding to a high of $0.65342. At the time of writing, AUD/USD was up 0.06% to $0.65341.

However, trade developments remain crucial for near-term AUD/USD price trends. Given that China accounts for one-third of Aussie exports, the Aussie dollar remains sensitive to China’s economic data and US-China trade headlines. During Tuesday’s (July 8) press conference, RBA Governor Michele Bullock underscored the significance of trade developments and Beijing’s stimulus moves, stating:

“On tariffs, there will be an impact on us, partly driving deflationary forecasts, but the impact on Australia will likely be less severe than on the US. Trade terms with China remain crucial. If China bolsters its economy with fiscal stimulus that could cushion the impact of tariffs on Australia’s economy.”

Outlook: Trade Data and Trade Developments

On Saturday, July 12, trade data from China will require consideration. Markets continue to assess the impact of tariffs on demand.

Economists forecast exports to rise 5.5% YoY in June, up from 4.8% in May and imports to increase 2.5% (May: -3.4%). While stronger trade terms will offer market relief, the US administration’s latest tariff moves could challenge hopes of a pickup in demand for Chinese goods.

Last week, Vietnam accepted a 20% tariff on exports to the US. The US also imposed a 40% levy on trans-shipments. The 40% tariff could impact China’s efforts to avoid US tariffs. On July 7, President Trump announced a 32% tariff on Indonesia, signaling a potential proxy trade war with China.

In May, China’s exports to Indonesia and Vietnam surged 25% and 30% (year-on-year), respectively. Exports to the US plunged 43%, while total exports rose by 4.8%.

A proxy trade war could intensify competition, further impacting prices and company profits.

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