China’s economic rollercoaster: Consumer prices inch up in April amid lingering factory deflation

China’s consumer prices climbed for the third straight month in April, marking a positive trend, yet producer prices remained on a downward trajectory. This dichotomy signals enduring challenges for the world’s No. 2 economy. 

Data released by the National Bureau of Statistics revealed a 0.3 per cent year-on-year increase in consumer prices, compared to a 0.1 per cent rise in March, surpassing economists’ expectations of a 0.2 per cent uptick.  

Core inflation, excluding volatile food and fuel prices, also saw a slight increase from 0.6 per cent in March to 0.7 per cent in April. Overall, the consumer price index (CPI) rose by 0.1 per cent from the previous month, defying forecasts of a 0.1 per cent decrease and reversing the 1 per cent decline seen in March.  

But the producer price index (PPI) dropped 2.5 per cent year-on-year in April, extending a 1.5-year decline. 

“PPI deflation eased and CPI inflation rose in March, but they remained relatively subdued compared with pre-pandemic norms. We think inflation will continue to edge up in the near term. But persistent overcapacity will likely keep it very low for the foreseeable future,” said Zichun Huang, China Economist at Capital Economics. 

This mixed picture reflects the complexities of China’s economic recovery, with concerns lingering over deflationary pressures and a slowdown in the property sector. 

President Xi Jinping is pushing for a resurgence in manufacturing, particularly in high-tech industries, to bolster economic growth. However, this has sparked worries among Western leaders about increased competition from cheap Chinese imports. 

 In response, President Joe Biden is considering imposing new tariffs, including on electric vehicles. 

To stimulate economic activity, Chinese authorities are planning to issue 1 trillion yuan worth of long-term bonds.  

Despite these efforts, analysts caution that sustaining growth may be challenging, given cooling factory and services activity and an ongoing housing crisis. To manage debt, local governments have been advised to postpone or cancel some infrastructure projects. 

Overall, while there are some positive signs in China’s economic landscape, policymakers face a delicate balancing act between stimulating growth and maintaining stability in the face of persistent challenges.  

Achieving the targeted economic growth of around 5 per cent in 2024 may require further policy support and careful navigation of these complexities. 

“Deflationary pressure will continue in China due to insufficient effective demand, but CPI and PPI may diverge on structural drivers going forward. However, China’s PPI deflation looks stubborn because the US Fed tightening cycle remains restrictive to global commodity prices,” said ZhaoPeng Xing, Senior China Strategist at ANZ. 

“As price takers, Chinese factory activities have improved on recent inflation uptick in advanced economies. The persistency will be a question mark due to the uncertainty around the Fed cut expectation.” 

The People’s Bank of China is set to reveal its medium-term lending facility rate midweek, followed by a flurry of April data releases on Friday. These releases will be closely monitored to gauge the beginning-of-quarter recovery. 

Economists argue that more monetary policy support is necessary to strengthen the ongoing recovery momentum. Recent discussions from April’s Politburo meeting have fueled expectations for potential support measures in the pipeline.  

“We keep our 2024 forecasts for CPI at 0.7 per cent and PPI at -1.5 per cent. The People’s Bank of China may trim the required reserves ratio (RRR) for banks by 25bp in Q2 and cut policy rates by 10bp in Q3, as indicated in Q1 Monetary Policy Report,” Xing added.