China's consumer prices have experienced a decline for the fourth consecutive month as of May, indicating that the government's stimulus measures are proving insufficient to stimulate domestic consumption. This situation is further exacerbated by intense price wars in the automotive sector, which are contributing to downward pressure on prices. According to the National Bureau of Statistics, released on Monday, the consumer price index (CPI) fell by 0.1% compared to the previous year, slightly better than the median estimate of a 0.2% decline predicted by analysts surveyed by Reuters.
The CPI slipped into negative territory back in February, registering a 0.7% drop year-on-year, and has continued to show year-on-year declines of 0.1% in both March and April. In contrast, core inflation, which excludes volatile food and energy prices, rose by 0.6% in May, marking the highest level since January, according to data from Wind Information.
In addition to consumer prices, the deflationary trend has deepened in China's factory-gate prices, with a notable decline of 3.3% recorded in May compared to the previous year. This decline was sharper than the anticipated 3.2% drop by analysts. As per data from LSEG, wholesale prices have remained in a deflationary state since October 2022. Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, noted that the ongoing weak consumer demand and fierce price competition in the automotive sector have significantly contributed to lower prices.
Chinese policymakers have been advocating for an end to the brutal price wars in the automotive industry, which have adversely affected business profitability and operational efficiency. Zhang emphasized that the price war in the auto sector is a clear signal of intense competition driving prices down. Additionally, he pointed out that declining property prices have also played a role in exerting downward pressure on consumer prices. Although exports have remained robust, Zhang asserts that China must ultimately rely on domestic demand to combat deflation.
On May 7, Chinese financial regulators initiated a series of policy measures aimed at revitalizing the nation's economy, which has been impacted by tariffs. The People's Bank of China (PBOC) reduced key interest rates by 10 basis points to historic lows and lowered the reserve requirement ratio by 50 basis points, affecting the liquidity available to banks.
The backdrop of these economic changes includes the historical context of trade tensions, particularly following U.S. President Donald Trump's implementation of tariffs on Chinese goods, which peaked at 145%. In retaliation, Beijing imposed its own tariffs and export controls on critical minerals. However, on May 12, a preliminary agreement was reached between the U.S. and China in Geneva, resulting in both sides reducing a majority of tariffs. Washington lowered its tariffs on Chinese goods to 51.1%, while Beijing cut its taxes on American imports to 32.6%, according to the Peterson Institute for International Economics.
Chinese Vice Premier and lead trade representative He Lifeng is set to engage in renewed trade discussions in London with the U.S. negotiation team, led by Treasury Secretary Scott Bessent. These talks follow a resurgence of tensions as both countries accused each other of violating the Geneva agreement. The U.S. has criticized China for its slow approval of additional critical mineral exports, while China has responded to new U.S. restrictions on student visas and chip exports.
On Saturday, China's Ministry of Commerce reiterated its commitment to reviewing and approving applications for the export of rare earths, citing increasing demand for these minerals in the robotics and new energy vehicle sectors. As the temporary trade truce appears tenuous, market observers are keenly watching whether Beijing will implement more monetary easing measures to bolster its economy.
State-run media outlet China Securities Journal recently speculated that the PBOC might further reduce the RRR later this year to support economic growth and may also end its prolonged pause on government bond trading. This pause began in January to counteract plunging bond yields and a weakening currency.
All eyes will be on the upcoming annual Lujiazui forum in Shanghai, where key financial regulators, including PBOC Governor Pan Gongsheng, are expected to announce significant financial policies. Additionally, China is set to release its trade data for May later today, with expectations of a 5% year-on-year increase in exports, while imports are projected to have declined by 0.9% compared to the previous year, as per a Reuters poll.
