China’s Economic Policies Tested by Persistent Consumer Inflation and Worsening Factory Deflation

According to data released on Thursday, China experienced the slowest increase in consumer prices in over two years in April. Meanwhile, factory gate deflation continued to worsen, indicating that more stimulus may be necessary to bolster the country’s uneven economic recovery from the effects of COVID-19.

The feeble rise in consumer prices aligns with earlier indications from this week’s trade data that suggest weak domestic demand, while the deflationary trend in producer prices highlights the challenges facing factories. This double impact presents a significant challenge for the second largest economy in the world as it attempts to recover from the economic fallout caused by the pandemic.

According to the National Bureau of Statistics (NBS), the year-on-year increase in the Consumer Price Index (CPI) in April was only 0.1%, which is the slowest rate since February 2021, and a drop from the 0.7% rise in March. This outcome was below the expected 0.4% increase from a Reuters poll. In addition, there was a deepening of deflation for producers last month, which, along with the CPI data, demonstrates the challenges the broader economy is facing in recovering after the lifting of COVID restrictions in December. The Producer Price Index (PPI) fell at its quickest rate since May 2020, declining 3.6% year-on-year for the seventh consecutive month, following a 2.5% decline in the previous month. This result was lower than the projected 3.2% decrease.

China’s economy experienced a quicker-than-anticipated growth rate in the first quarter of the year following the easing of COVID-19 restrictions, though the recovery has been uneven. The most recent data reveals that factory activity has declined, while ongoing fragility in the property market is still a cause for concern.

Despite the reopening of the economy, analysts suggest that growth in food and energy prices has slowed, which has helped to mitigate any upward pressure on services inflation. As a result, there may be increased pressure on the People’s Bank of China (PBOC) to cut interest rates or provide additional liquidity to the financial system.

In March, the PBOC lowered lenders’ reserve requirements ratio (RRR) for the first time in 2021 and instructed banks to lower the ceiling on interest rates paid on particular types of deposits. In light of a post-COVID recovery that is losing momentum, ongoing disinflation, falling market rates, and the US Federal Reserve signaling a potential pause, Ting Lu, Chief China Economist at Nomura, opined that a PBOC policy lending rate cut is becoming more likely.

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