China’s consumer prices extended their deflationary path, as the consumer price index recorded a negative reading for the fourth month in a row in May. This double trend feeds fears of deflation and of weak aggregate demand in the country’s economy. The consumer price index (CPI) experienced a significant drop of 0.7% in February. It fell further with drops of 0.1% in March and April. Through May, core inflation was up just 0.6% on the year. The economic environment overall still poses substantial hurdles.
These deflationary pressures have dragged on China’s factory-gate prices, which dipped 3.3% year-on-year in May. From October 2022 through February 2023, they’ve fallen almost every month. This insidious trend has stoked the flames of a yawning economic anxiety. To address these challenges, the People’s Bank of China (PBOC) acted swiftly and surely. Retrospectively, the PBOC unexpectedly cut the main key interest rates earlier this year by 10 basis points to historic lows and the reserve requirement ratio (RRR) by 50 basis points.
To further support economic growth, the China Securities Journal reported that the PBOC may consider additional RRR reductions later this year. This step is an attempt to inject liquidity into the banking system and encourage further lending during a time of persistent deflationary forces.
On another front, China is set to end a months-long ban on government bond trade. This decision is intended to stimulate overall market activity. It aims to increase investor confidence as consumer prices continue to decline and negative economic indicators pile up.
China will announce its May trade data shortly. Expectations are high, with exports up by 5% over last year expected. Imports are expected to decrease by 0.9% from last year. This drop may be a sign of weakening domestic demand.
Meanwhile, China’s Ministry of Commerce is busy reviewing and approving applications for the export of rare earths. This move is a direct response to our growing economic crisis. This action shines a light on how critical these materials have become to the global supply chains. It further illustrates that China is critical to this market.
The annual Lujiazui Forum, which is usually dominated by State Council speeches and discussions, will include keynote speeches from Chinese financial regulators, including PBOC Guv Pan Gongsheng. These conversations will explore practical solutions to address the urgency of our current economic moment. They’ve got to push growth in the face of persistent deflationary forces.