Lin Li and Khang Sek Lee of MUFG note that China’s January CPI slowdown was heavily distorted by Chinese New Year base effects, with headline inflation impacting food and services prices. PPI deflation eased due to higher global metals prices and technology demand. They expect reflation to remain gradual despite anti-involution measures, while the PBOC’s “moderately loose” stance and upcoming easing should keep USD/CNY on a soft downward path in 2026.
Base effects mask the underlying reflationary trend
“Looking beyond the January prints, we believe reflation is likely to remain gradual despite the ongoing anti-involution campaign.”
“In China, the PBOC reinforced its clear easing stance for 2026, signaling that monetary policy will remain “moderately loose.” China’s GDP slowed to 4.5% y/y in the fourth quarter.
“Further policy easing may be necessary in the first half of 2026 to support the economy and revive credit demand.”
“In Asia, investors will be looking for further monetary easing measures to combat structural slowdowns at the People’s Bank of China (PBOC) meeting on February 20.”
“The PBOC recently committed to maintaining a ‘moderately loose’ policy to support domestic demand, which could keep the CNY at the lower end of the trading range.”
(This article was created with the lend a hand of an artificial intelligence tool and has been reviewed by an editor.)
