^{Photo: South China Morning Post}

Consumer Inflation Dips Again, Raising Red Flags

China’s consumer economy continues to show worrying signs of stagnation, as the Consumer Price Index (CPI) fell 0.1% in May — the fourth consecutive monthly decline, according to the National Bureau of Statistics (NBS). This marginal drop follows a similar 0.1% contraction in both April and March, and a more significant 0.7% year-over-year decline in February, marking an extended period of deflationary pressure.

The May figure slightly beat market expectations of a 0.2% drop (Reuters forecast), but the trend is deeply concerning for policymakers hoping to stimulate domestic consumption. In fact, core inflation, which strips out volatile food and energy prices, saw a modest rise of 0.6% year-over-year, the highest increase since January 2024, based on Wind Information data. While this uptick might suggest pockets of stability, it hasn't been strong enough to counteract broader disinflation.

Producer Prices Sink Further: Steepest Drop in 10 Months

Factory-gate prices, reflected by the Producer Price Index (PPI), plunged 3.3% year-over-year in May, according to data from LSEG. This is the sharpest fall since July 2023, and slightly worse than economists' projections of a 3.2% decline.

Producer prices in China have now been stuck in deflationary territory since October 2022, driven by slack demand, excess capacity, and increasingly competitive industries. For instance, wholesale prices in coal mining and oil/gas extraction sectors nosedived by 18.2% and 17.3%, respectively — evidence of a deeper slowdown in industrial activity.

Auto Industry Price War Accelerates the Downward Spiral

One of the biggest contributors to China’s consumer deflation is the ongoing price war in the automotive sector. Analysts, including Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, have warned that heavy discounting and aggressive sales tactics among carmakers are driving prices down and eroding profitability.

The Chinese government has urged automakers to stop extreme pricing strategies, citing long-term risks to competitiveness and sustainability. However, intense competition and sluggish demand continue to fuel these practices.

“Falling property prices are another major source of downward pressure,” Zhang added, noting that weak real estate markets are also stifling broader consumer sentiment.

Stimulus Measures Not Enough — More Action Needed

To combat sluggish demand and weakening prices, Chinese authorities have rolled out a series of stimulus policies. In early May, the People’s Bank of China (PBOC) reduced key interest rates by 10 basis points, bringing them to historic lows. The central bank also cut the reserve requirement ratio (RRR) by 50 basis points, freeing up liquidity for banks to boost lending.

Despite these moves, economists argue that more targeted and aggressive action is needed. Dong Lijuan, NBS Chief Statistician, emphasized the need for “more forceful and precise stimulus measures” to invigorate domestic consumption.

According to state-owned China Securities Journal, the PBOC is considering another RRR cut later this year and may resume government bond purchases, which were paused in January due to concerns over bond yield volatility and currency weakness.

Trade Front Developments Add to the Mix

While domestic demand remains weak, China's exports have remained relatively resilient. May trade data — expected later today — is anticipated to show a 5% year-over-year rise in exports, while imports may dip by 0.9%, based on a Reuters poll. However, the trade environment remains uncertain.

On May 12, China and the U.S. reached a tentative tariff-reduction agreement during talks in Geneva. The U.S. lowered average tariffs on Chinese goods from 145% to 51.1%, while China dropped tariffs on American goods to 32.6%, according to the Peterson Institute for International Economics. This partial truce offered temporary relief to both sides.

But the agreement remains fragile. Tensions have reemerged, with the U.S. accusing China of stalling critical mineral exports, while Beijing criticized new restrictions on Chinese student visas and U.S. export limits on semiconductors.

Later today, Chinese Vice Premier He Lifeng is expected to meet U.S. Treasury Secretary Scott Bessent in London to resume high-stakes trade negotiations. Their goal: stabilize trade relations and potentially build toward a more comprehensive accord.

Looking Ahead: Key Events on the Horizon

Markets will closely watch the upcoming Lujiazui Forum in Shanghai, scheduled for later this month. This annual financial policy summit will feature keynote addresses from major regulators, including PBOC Governor Pan Gongsheng. Expectations are high that new economic support policies will be unveiled during the event.

Can China Avert a Deflationary Spiral?

Despite signs of recovery in some areas, China’s economy is grappling with a persistent deflationary undercurrent. Falling consumer prices, plummeting factory-gate costs, and ineffective stimulus measures pose a real challenge to sustainable growth. Until domestic demand gains real traction — particularly in housing and consumption — the specter of deflation will continue to haunt the world’s second-largest economy.

Experts and market watchers will be looking for more decisive policy action, clearer trade progress, and stronger consumer confidence to reverse this worrying trend.