Weak Inflation Data Shows the Economy in China Remains in Trouble
Weak Inflation Data Shows the Economy in China Remains in Trouble
By:Ilya Spivak
China’s economy is in trouble, and Beijing is not doing enough to fix it.
- Weak inflation data shows China’s economy remains in the doldrums.
- Traders are eying the March NPC meeting with hope, but the markets remain weak.
- China must go beyond its “bait-and-switch” fiscal policy to woo investors.
China reported another set of anemic inflation data, signaling the world’s second-largest economy remains in the doldrums. Consumer prices (CPI) grew just 0.1% year-on-year in December, the slowest in nine months. Producer prices (PPI)—a wholesale inflation gauge—fell 2.3% year-on-year, a limp uptick after a 2.4% drop in November.
More broadly, Chinese inflation has been all-but nonexistent since April 2023. This speaks to the absence of demand that has plagued the economy since it emerged from “zero-Covid” lockdowns in late 2022. Purchasing managers’ index (PMI) data reveals an upswell of activity in the first quarter of 2023, followed by a rapid return to a near standstill.
Weak inflation speaks to absence of demand in China
Indeed, real gross domestic product (GDP) growth has outpaced nominal expansion for six consecutive quarters. This implies negative price growth at the economy-wide level to the tune of 0.9 percentage points of gross domestic product (GDP) on average since would-be “reopening” momentum fizzled. A dizzying array of stimulus measures has failed to work so far.
Financial markets have long hoped that China will come around to delivering a big dose of demand-replacing fiscal stimulus to kickstart activity. They roared with approval in September when the Politburo—the country’s steering committee of 24 officials including President Xi Jinping—hinted at such a possibility. Concrete steps are yet to materialize.
Markets will be watching the annual session of China’s broader parliament—the National People’s Congress (NPC)—in early March to see if Beijing is finally ready for some heavy lifting. The target for the year’s budget deficit may be especially telling, according to a report from Reuters. A rise from 3% to 4% may signal expansionary intent.
China needs to get serious about fiscal policy
Meanwhile, The Economist reports that persistent economic malaise is straining the social order. Random acts of violence—so-called “revenge on society” attacks, like knifings and cars driven into crowds—increased in 2024. The rise was large enough that officials promised a harsh crackdown. Ironically, that might dampen consumer confidence further.
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Tellingly, China’s CSI 300 stock benchmark, an index of the top issues in Shanghai and Shenzhen, is starting 2025 pinned to three-month lows. Among the standby “China proxy” assets, the Australian dollar has slid to the weakest point since October 2022. Copper has bounced from recent lows, but a Bloomberg report chalks this up to U.S. tariff fears.
Bargain-hunting investors pounce on beaten-down assets when the stock of bad news seems to be exhausted, long before evidence of improvement can be seen in earnest. That may eventually make Chinese and related markets an attractive opportunity, but any such move will struggle if the “bait-and-switch” approach to fiscal policy persists.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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