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China's consumer inflation, though steady in May, and the slight easing of the decline in factory gate prices, are not enough to alleviate the severity of the economic situation. Economists stress the urgent need for more aggressive stimulus measures to bolster the country's sluggish economy.
"The data suggests that low inflation is likely to persist as the base case," warned Zhou Hao, chief economist at Guotai Junan International. "For investors, it's crucial to be cautious about whether China can convert recent increases in commodity prices into a positive Producer Price Index (PPI) in the second half of the year."
China's economic recovery has been uneven since the lifting of strict COVID-19 restrictions in late 2022. The ongoing property sector crisis, characterized by a significant decline in property sales and a surge in property prices, continues to dampen investor, business, and consumer confidence, posing a significant challenge to the country's economic stability.
"I believe that the deflationary pressure has not yet diminished," said Zhiwei Zhang, chief economist at Pinpoint Asset Management. "The improvement in PPI is largely driven by external factors, not a reflection of China's domestic demand."
Zhang's concerns are echoed by the weak month-on-month CPI reading, which decreased by 0.1% compared to April, contrary to economists' predictions of flat growth.
The Chinese government has implemented different measures to stimulate demand in the housing market and boost consumer spending. These include government-subsidized incentives for trade-ins of automobiles and other consumer goods, such as offering tax breaks and financial support for consumers who trade in their old vehicles for new, more energy-efficient models. Additionally, authorities pledged to create more project-related jobs, launch youth-targeted initiatives to stimulate domestic demand and increase fiscal stimulus to support growth.
Wednesday's data on core inflation, which excludes volatile food and energy prices, underlined the challenges policymakers face. The core inflation gauge stood at 0.6% year-on-year in May, down from 0.7% in April, indicating a slight decrease in the general price level of goods and services.
"Persistent industrial overcapacity will likely keep the rebound in consumer inflation very modest," said Zichun Huang, China economist at Capital Economics. Huang forecasts an average inflation rate of just 0.5% for 2024.
Many economists foresee further support measures from Beijing in the coming months to achieve its GDP growth target of "around" 5% for 2024 and foster a sustainable economic recovery. However, it is a shared responsibility to acknowledge that a comprehensive fiscal and monetary policy package is crucial to restore confidence and encourage households and businesses to spend again.
"Last month's measures to stabilize the property sector were seen as insufficient by markets and investors," said Pinpoint's Zhang. "A more comprehensive and proactive policy stance across fiscal, monetary, and property sectors is likely needed to effectively boost domestic demand."
