• Consumer price index rose modestly for a fourth month
  • Factory-gate prices in deflation streak since late 2022

China’s consumer prices rose less than expected in May and factory prices dropped for the 20th month in a row, stoking concerns over persistently weak demand.

The consumer price index rose 0.3% from a year earlier, the National Bureau of Statistics said Wednesday, hovering above zero for the fourth straight month and comparing to a median forecast of 0.4% in a Bloomberg survey of economists. Factory-gate prices extended a deflation streak that started in late 2022.

The still-weak prices have fueled calls for more government action to shore up demand.

“The deflationary pressure has not faded yet,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management, noting that consumer prices fell modestly in May from April. “A more comprehensive and proactive policy stance covering fiscal, monetary, and property sector may be necessary to boost domestic demand more effectively.”

Core inflation, which strips out volatile food and energy prices, rose 0.6%. The producer price index slid 1.4% in May from a year earlier after a 2.5% decline in April, largely due to rises in commodity prices.

The government has struggled to spur higher household spending amid a prolonged real estate slump and a gloomy job market, with the country suffering its longest deflation streak since the Global Financial Crisis through January. Falling producer prices are squeezing companies’ profits and making them reluctant to invest. There’s also a risk consumers could become even more reluctant to spend in anticipation that goods will be cheaper in the future.

The benchmark CSI 300 Index of onshore stocks closed little changed on Wednesday, while Chinese shares trading in Hong Kong fell 1.4% as of 3:48 p.m. local time.

What Bloomberg Economics Says…

“Another month of anemic consumer price data is a clear sign more stimulus is needed to boost China’s domestic demand. We expect some relief to come June 17, when we see the People’s Bank of China starting its 2024 rate cuts with a 10-basis point reduction in the key rate.”

— David Qu, economist

Read the full report here.

Industrial enterprises have long been struggling with slowing profit gains, as price competition in sectors such as battery making and electric vehicles gets intense amid complaints over China’s manufacturing overcapacity by foreign governments.

Possible moves by Beijing to curb excess capacity in response to the concerns might “help alleviate producer price deflation,” said Raymond Yeung, Greater China chief economist at Australia & New Zealand Banking Group Ltd.

“In our view, however, the key to address the downward price pressure is to revive domestic demand. As the property woes remain stubbornly weak, the low inflation regime seems to be a normality,” he said.

Economists surveyed by Bloomberg forecast consumer prices to increase by 0.7% this year, a far cry from the 3% official target.

China last month unveiled a broad real estate rescue package to address the biggest cloud over China’s economy, relaxing mortgage rules and encouraging local governments to buy unsold homes. But investors and analysts remain skeptical that the measures will be sufficient due to the limited central bank funding support revealed and apparently slow progress in trial programs in several cities.

In a major drive to spur consumption, Chinese authorities has since April rolled out a program to encourage businesses and households to upgrade old machinery with government subsidies, with the support for consumers focusing on cars. The Ministry of Finance earlier this month published that total subsidies for auto trade-ins this year will exceed 11 billion yuan ($1.5 billion).

“The upcoming implementation of the trade-in replacement scheme will positively impact household and business demand, hopefully inducing demand-led inflation somewhat,” Kelvin Lam, a Pantheon Macroeconomics economist, wrote in a note.

A strong rebound in domestic demand, however, will require “the current economic malaise” to be addressed, such as the property woes and the elevated local debt stockpile, according to Lam.

“We expect more structural reforms to be announced at July’s Third Plenum, with additional stimulus measures on the way,” he said, maintaining a call for the central bank to cut the rate on a key one-year loan to lenders by 10 basis points this month.

Written by: Bloomberg News — With assistance from Lucille Liu, Fran Wang, and Lin Zhu @Bloomberg