China reaction: Prices soften, fiscal measures lack numbers

Spikes in food prices fail lift headline inflation

China's Consumer Price Index (CPI) inflation slipped to 0.4% yoy in September, down from 0.6% in August and falling short of the market expectation of 0.6%. On a monthly basis, headline CPI dropped further to 0% from 0.4% in August. Prices generally weakened across the board in September, except for food prices, which rose by 3.3% yoy, up from 2.8% in August. Additionally, extreme weather conditions, particularly in China’s major farming regions, drove a sharp 12.1% month-on-month (mom) increase in vegetable prices. However, this spike in food prices was not enough to offset the broader downward pressure on headline inflation – and indeed may have added to depressed prices elsewhere.

Core CPI inflation, which excludes food and energy, continued to decline, reaching its lowest rate since early 2021 at 0.1% yoy, down from 0.3% in August. The monthly deflationary trend, narrowed to -0.1% in September from -0.2% in August. Service price inflation, which has been falling since February, slid further to 0.2% yoy, compared to 0.5% in August. Non-food prices fell into deflation territory for the first time since June 2023, at -0.2% yoy.

September’s inflation figures highlight the ongoing challenges in consumer spending amidst a lack of effective policy measures. The sharp rise in food prices may have also triggered a substitution effect, with households cutting back on other expenditures to prioritise necessities such as food. As households face the wealth and income impact of asset price corrections and a soft labour market, the surge in food prices has only worsened the situation. With the weaker-than-expected September data, the headline CPI is now tracking for an average of 0.5% for 2024. We currently forecast 1.6% for 2025, based on an assumption of effective and modest stimulus package that could boost labour market and stabilise the property price.

PPI deflation deepens further

Producer Price Index (PPI) deflation worsened to -2.8% yoy in September, down from -1.8% in August, missing market expectations of -2.6%. The decline was broad-based, with energy-related prices particularly hard-hit – although not surprising given weaker global oil prices this month. Producer goods PPI deflation deepened to -3.3%, from -2.0% in August, while consumer goods PPI fell to -1.3%, down from -1.1%.

Prices in the oil and gas extraction sector continued their decline, falling -10.1% yoy in September, compared to -3.3% in August. Upstream sectors also saw further drops, with ferrous metal smelting and pressing declining by -11.1% yoy from -8.0% in August. Downstream sectors were more stable, though durable goods PPI and auto manufacturing edged down to -2.1% and -2.3 yoy in September, respectively (August: -1.9% and -2.2% respectively).

The September figures mark two consecutive years of deflation in China’s factory gate prices, underscoring the persistent weakness in consumer demand and the ongoing property market downturn. In the pervious episode, prolonged PPI deflation lasted for 54 months, ending only in September 2016 as the property sector recovered. This time, with deeper and more entrenched challenges in the housing market, factory prices are likely to remain subdued for an extended period.

Acceleration in policy moves targeting short-term gains

Chinese authorities have ramped up supportive measures since late September. The monetary easing announced on September 24 was well received by the market, with the rare support for the equity market triggering significant rallies in China’s stock market. On the fiscal side, the tone has been positive, but the detail vague, lacking specifics regarding the size of the stimulus package. Following a press conference from the Ministry of Finance (MoF) on Saturday, we expect a package of RMB 2-4 trillion to be announced soon, likely involving a fiscal deficit revision, unused local government bond quotas, and additional central government bond issuance. The MoF also promised a debt swap programme to address hidden debt issues and to utilise local government special bonds for a property inventory buy-back scheme.

In our view, although targeting 2024’s growth target, the anticipated fiscal measures are steps in the right direction, addressing key bottlenecks in the economy. However, timing is crucial—swift action is needed to maximise the impact.