20250710-招银国际-China_Economy_Persistent_deflationary_pressure_7页_913kb

China Economy Analysis Summary

Overview
The report highlights persistent deflationary pressure in China's economy. Despite recent rebounds in energy prices, core inflation remains subdued, and industrial output continues to face downward pressure. Consumer demand and global trade conditions are key contributors to this deflationary trend.

Key Economic Indicators

• CPI: Inflation returned to positive year-on-year growth in June (YoY: +0.1%), but monthly growth remained negative (-0.1%). Factors include food price declines and weak durable goods, with energy prices partially offsetting this drop. Core CPI edged up slightly due to increasing prices in specific services.
• PPI: Slumped to a two-year low (-3.6% YoY), with mining and manufacturing sectors under pressure. High export dependency exacerbates deflationary risks, and intense supply-side competition continues.

Deflationary Drivers and Challenges

• Weak consumer demand, global trade softening, and China's property sector slowdown intensify headwinds. The trade-in stimulus scheme may contribute to deflationary pressures. Ongoing supply-side issues from competition have not eased significantly despite policy efforts.

Policy Recommendations and Outlook
Policymakers are considering actions such as a 10bps LPR cut and 50bps RRR reduction in the fourth quarter of 2025 to stimulate consumption and the property market. A potential trade deal with the US could facilitate this shift toward economic rebalancing, focusing on consumption and capacity reduction. Despite efforts, 2H25 is expected to bring further challenges due to deflation, with CPI and PPI projected to rise minimally.