Commerzbank analysts emphasize that the June consumer price index (CPI) in China slowed to 1.0% year-on-year, while the producer price index (PPI) increased by 4.1%, widening the PPI-CPI gap and reducing downstream segment margins. The PBOC admitted there was a “structural mismatch” between high-tech strength and feeble consumption. Despite this situation, both USD/CNY and USD/CNH fell, reflecting some strength in the currency even though domestic demand remains subdued.
The pace of reflation in China is slowing
“China’s reflation recovery lost steam in June, with CPI rising 1.0% year-on-year (Bloomberg consensus: 1.1%) compared to 1.2% in April and May. This reading marks the slowest CPI reading in three months and reinforces concerns that domestic demand remains structurally weak even as the broader economy stabilizes.”
“Underlying CPI, which excludes food and energy, also came in at 1.0% year-on-year, compared with the expected 1.1%, signaling that underlying demand-side price pressures have not yet increased significantly.”
“The Producer Price Index told a different story, rising 4.1% year-over-year in June, in line with the consensus, compared with 3.9% in May, driven by elevated production costs related to metals and energy. The widening gap between factory-level inflation and low consumer prices continues to squeeze margins for downstream producers who are unable to pass on costs to end consumers.”
“The USD/CNY foreign exchange market fell 140 pips to 6.79 yesterday and the USD-CNH offshore exchange rate fell 100 pips to 6.80 yesterday.”
“Manufacturing profit growth also showed early signs of fatigue, with year-on-year growth falling for the first time since November, suggesting that strong exports and price growth are no longer sufficient to offset weak domestic demand.”
“The two-speed dynamic is equally evident at the sectoral level. The PBoC’s quarterly statement on Wednesday introduced new language acknowledging ‘structural divergence’ in the economy, a characterization the central bank has not used before, reflecting a growing imbalance between the outperformance of the AI-powered high-tech sector and volatile consumer spending.”
(This article was created with the assist of an artificial intelligence tool and has been reviewed by an editor. Find out more.)
