Consumer rebound fails to offset industrial weakness
China’s producer price index (PPI) fell 3.6% year-over-year in June, the sharpest drop since July 2023 and worse than the 3.2% decline forecasted by analysts. The ongoing deflationary pressure underscores a fragile economic environment marked by sluggish demand and intensifying price wars among manufacturers.
In contrast, the consumer price index (CPI) showed a modest 0.1% gain from a year earlier, marking a return to growth after four months of contraction. Core CPI, which excludes food and energy, rose 0.7%, the highest in over a year, reflecting a partial improvement in household spending patterns.
Price wars and policy dilemmas
The steep drop in producer prices has been attributed to widespread discounting across industries, a phenomenon known in China as “involution” or “neijuan.” The trend has seen companies slash prices to move inventory, despite little improvement in consumer demand. Industrial profits dropped 9.1% in May, the worst performance since October 2023.
President Xi Jinping and senior officials, during a recent high-level economic meeting, criticized the unsustainable nature of excessive discounting and called for tighter regulations. Policymakers urged companies to focus on quality improvement and phasing out outdated production rather than competing solely on price.
Stimulus effects are fading
Economists noted that a modest CPI rebound was partially driven by Beijing’s consumer subsidy programs for appliances and electric vehicles. However, these short-term boosts are unlikely to sustain inflation momentum in the second half of the year, especially amid persistent supply-demand imbalances and overcapacity.
“Without a strong policy stimulus, it’s hard to escape the ongoing deflationary spiral,” said Larry Hu, chief China economist at Macquarie. Zichun Huang of Capital Economics echoed similar concerns, warning that the current deflationary environment is likely to persist unless substantial demand-side support is introduced.
Exports offer limited relief
Despite domestic struggles, China’s exports have remained surprisingly resilient. Shipments rose 4.8% in May and 8.1% in April, driven largely by trade with Southeast Asia. However, economists warn that this export strength could deter Beijing from launching stronger domestic stimulus measures unless export growth falters significantly.
Mainland China’s CSI 300 index rose 0.19% following the data release, reflecting a cautiously optimistic market response. Still, underlying structural issues continue to weigh on China’s economic outlook as deflation risks deepen and policy responses remain limited.