China’s Inflation Resilient but Producer Prices Hint at Deflation

China Inflation Numbers and Producer Prices Send Mixed Signals

Deflation remains a key talking point in the context of the US-China trade war, China’s demand weakness, and intensifying domestic price wars. July’s inflation figures may provide Beijing with some relief.

Consumer prices increased 0.4% month-on-month in July after falling 0.1% in June. The upswing in July’s consumer prices meant China avoided deflation, with inflation flat year-on-year — preferable to a decline but still weak. Nevertheless, consumer prices had risen 0.1% year-on-year in June, underscoring the risk of further deflation.

CN Wire provided a breakdown of China’s YoY price changes. Notably, food, tobacco, liquor (-0.8%), and transportation & communication (-3.1%) affected the annual inflation rate. Near-term trends for food, tobacco, & liquor prices could be crucial in Beijing’s deflation battle.

However, producer prices told a different story. The numbers suggested that weak demand may persist, heightening the risk of further deflation. Producer prices fell by 3.6% YoY in July, mirroring June’s decline. Economists had expected producer prices to drop 3.3%.

Producer Prices and Manufacturing PMIs – A Gloomy Economic Backdrop

Producer price trends aligned with China’s manufacturing PMI data for July. The S&P Global China General Manufacturing PMI survey showed that manufacturers cut their selling prices amid intensifying competition. Manufacturers reported new export orders contracted for a fourth consecutive month. New order growth slowed, increasing competition for new business.

Producers typically adjust prices based on demand. Weaker demand means lower prices and greater cost savings for consumers.

Notably, the S&P Global China General Manufacturing PMI fell from 50.4 in June to 49.5 in July, dropping below the neutral 50 mark. China’s NBS Manufacturing PMI fell deeper into contraction, declining from 49.7 in June to 49.3 in July.

Exports Paint a Different Picture

In contrast to the Manufacturing PMIs and producer price trends, China’s trade terms improved in July, signaling robust external demand for Chinese goods. Exports soared 7.2% year-on-year, up from a 5.8% increase in June. Notably, imports rose 4.1% following June’s 1.1% rise.

A US-China trade deal, with lower tariffs on Chinese goods, could further boost exports, easing deflationary pressures. On the other hand, an escalation in US-China tensions may weigh on external demand, potentially intensifying deflationary pressures.

Market Outlook: Trade Talks and Looming Economic Data Key

China’s inflation numbers will set the early tone for the week. However, trade developments and key economic data on August 15 may ultimately drive sentiment.

Progress toward a US-China trade deal would likely overshadow the inflation numbers, lifting sentiment. Market sensitivity to the upcoming data hinges on trade headlines.

A trade deal and upbeat industrial production, labor market, and retail sales figures could drive Hong Kong and Mainland China-listed stocks to new 2025 highs. However, stalled trade talks may weigh on sentiment, potentially triggering a flight-to-safety.

The Hang Seng Index gained 1.43% in the week ending August 8, closing at 24,859. Meanwhile, Mainland China’s CSI 300 and the Shanghai Composite Index advanced 1.23% and 2.11%, buoyed by trade developments and the jump in exports.

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