China’s consumer prices continued to rise for the third consecutive month in April, indicating a recovery in domestic demand. Despite ongoing challenges in the economy, including declining producer prices and cooling factory and services activity, the data suggests that policy support measures implemented by Beijing are bolstering consumer confidence. The consumer price index (CPI) increased by 0.3% YoY, surpassing expectations and reflecting a rebound in demand for services. Core inflation, excluding food and fuel prices, also grew by 0.7% in April. However, analysts caution that the momentum may not be sustainable, as factors such as a housing crisis and fiscal strains on local governments persist.
Officials are currently grappling with the significant issue of municipal debt, which has reached a staggering $13 trillion. In response, the State Council has advised heavily indebted local governments to either delay or halt certain state-funded infrastructure projects. Despite this, there are some positive signs in the Chinese economy. Zhou Maohua, a macroeconomic researcher at China Everbright Bank, believes that the prices data indicates a recovery in domestic demand, with supply and demand continuing to improve. Additionally, there is an optimistic outlook for domestic demand and price recovery. However, Zhou also points out that consumer prices remain low and the industrial manufacturing sector is still under pressure, suggesting that there is insufficient effective demand and an imbalance in the sector’s recovery. In April, the producer price index (PPI) dropped 2.5% compared to the previous year, marking a slight improvement from the 2.8% decline in the previous month. This decline has been ongoing for the past year and a half. In light of these circumstances, China’s central bank announced on Friday that it plans to adopt a flexible, precise, and effective monetary policy. The goal is to encourage a moderate recovery in consumer prices and solidify the overall economic recovery. This announcement follows the Politburo’s remarks in April, where they stated that China would utilize policy tools such as banks’ reserve requirement ratio (RRR) and interest rates to support economic growth. Bruce Pang, the chief economist for China at Jones Lang LaSalle, suggests that given the Politburo’s observation that effective demand is still lacking, policy support should be implemented to take advantage of the current momentum. This can be achieved by strengthening expectation management and creating more consumption scenarios. Many analysts believe that China’s economic growth target of approximately 5% in 2024 will be challenging to achieve without further policy support.