China’s deflationary pressure may push PBOC toward further easing – ING

ING economists predict further monetary easing by the PBOC in late 2024 due to persistent deflationary pressures in China, as May data revealed a fourth consecutive month of negative CPI (-0.1% YoY) and a significant 3.3% drop in producer prices. Weak domestic demand, declining food prices, and trade headwinds, particularly a sharp fall in exports to the U.S., are contributing to the deflation, leading analysts to anticipate a potential 10-20 basis point rate cut if the trend continues despite recent stimulus measures.

Analysis

Persistent deflationary pressures in China's economy, evidenced by May's consumer price index declining 0.1% year-on-year for a fourth consecutive month and producer prices falling 3.3%—the largest contraction in 22 months—suggest a challenging domestic demand environment. ING economists anticipate that these conditions could necessitate further monetary easing by the People's Bank of China (PBOC) later this year, potentially including a 10-20 basis point rate cut in the fourth quarter if deflation persists despite recent stimulus efforts. The deflationary trend is exacerbated by soft domestic consumer sentiment, falling food prices, particularly fresh vegetables and eggs, and significant global trade headwinds, highlighted by a 34.5% year-on-year plunge in exports to the U.S. While robust shipments to ASEAN and the EU provided some cushion, resulting in 4.8% overall trade growth, the underlying weakness in domestic consumption and specific export markets remains a key concern for China's economic outlook.

Key Decisions for Investors

• Investors should closely monitor China's upcoming inflation data (CPI and PPI) and consumer sentiment indicators, as continued weakness could trigger further PBOC monetary easing, impacting Chinese asset valuations and the renminbi.
• Given the sharp 34.5% YoY decline in exports to the U.S., consider re-evaluating exposure to companies heavily dependent on U.S.-China trade, while noting the relative resilience in trade with ASEAN and EU markets.
• A potential 10-20 basis point rate cut by the PBOC in Q4 could offer tactical opportunities in interest-rate sensitive sectors within China, but sustained improvement will depend on a broader recovery in domestic demand and an easing of deflationary pressures.