China inflation subdued despite fiscal stimulus. Structural & consumer sentiment challenge

Data is here:

• China December CPI +0.1% y/y (expected +0.1%, prior +0.2%)

Recap (summary of a Reuters report):

• Consumer Price Index:

  • China’s CPI rose by 0.2% in 2024, matching the previous year’s growth and falling well below the 3% target.
  • December CPI increased by 0.1% year-on-year, slowing from 0.2% in November and marking the weakest pace since April.
  • Core inflation, excluding food and fuel, edged up to 0.4% in December, the highest in five months.

• Producer Price Index:

  • Factory-gate prices declined for the 27th consecutive month, with the PPI falling 2.3% in December year-on-year, an improvement from November’s 2.5% decline.

• Economic Challenges:

  • Persistent weak domestic demand is driven by:
    • Job insecurity.
    • A prolonged housing market downturn.
    • High debt levels.
    • Uncertainty over U.S. trade policies under President-elect Donald Trump.
  • Discounting is widespread across retail sectors, including items like bubble tea and luxury goods, while consumers increasingly rent instead of purchasing discretionary items.

• Stimulus Measures:

  • Policy stimulus has provided temporary support to demand and prices, but analysts expect its effects to fade, with inflation likely to weaken later in 2025.
  • Beijing has ramped up fiscal measures, including:
    • A record $411 billion in special treasury bond insurance.
    • Plans for substantial funding from ultra-long treasury bonds in 2025.
    • $41 billion allocated for equipment upgrades and consumer goods trade-ins, including vehicles.

• Analyst Outlook:

  • Economists point to persistent deflationary pressures, with inflation recovery tied to the effectiveness of fiscal policies.
  • The property sector downturn continues to drag on consumer confidence.
  • While the World Bank has upgraded China’s growth forecast for 2024–2025, subdued household and business sentiment remains a concern.

CPI:

This article was written by Eamonn Sheridan at www.forexlive.com.