China's recovery from deflation (a drop in prices) is not becoming clearly evident. Although the consumer price index (CPI) rose unexpectedly in June, it is insufficient to interpret it as a trend reversal, and the producer price index (PPI) fell for the 33rd consecutive month during the same period. Meanwhile, the Chinese government officially pointed out the 'overproduction' issue, which it had previously denied.
According to China's National Bureau of Statistics, the CPI, which shows variations in consumer purchase prices, has continued to decline compared to the same period last year for four consecutive months from February to May, but recorded a 0.1% increase in June compared to the same month last year. This was a figure that exceeded the forecast compiled by financial information provider Wind (which expected a 0.03% decline), and the National Bureau of Statistics interpreted it as a result of the government's consumer stimulation policies yielding positive outcomes.
However, considering that the CPI rose by 0.5% in January and then dropped by 0.7% in February, continuing to decline until May, it is too early to assess that a trend reversal has occurred with only a 0.1% increase in June.
Additionally, the PPI, which indicates trends in producer shipment prices, has recorded a decline for 33 consecutive months. If the CPI is used to judge consumers' purchasing power, the PPI can be used to assess changes in pre-distribution production expenses. China's PPI in June fell by 3.6% compared to the same month last year. This is the largest decline since July 2023 and fell short of Reuters' forecast of a 3.2% drop.
U.S. CNBC stated, "In a situation where demand is stagnant and difficulties are increasing, the phenomenon arises as price competition intensifies," adding, "Without strong policy stimuli, it will be difficult to break free from the cycle of deflation."
In this context, the Chinese government also identified overproduction as a cause of deflation. The Central Propaganda Department of the Communist Party of China noted in an article on the 1st of this month, "Some issues still exist in economic operations, hindering the balance between supply and demand," and added, "For example, some local governments prioritize production over consumption, leading to frequent instances where the increase in consumption does not keep pace with the expansion of supply."
It further pointed out that "overproduction has plunged some industries into a state of internal competition, increasing pressure on the survival of corporations and, in fact, dampening consumer sentiment and corporate investment willingness." It attributed this to excessive incentives such as subsidies, land, and tax benefits. This contrasts with President Xi Jinping's statements that there was "no overproduction issue in China" until last year.
Meanwhile, foreign media mentioned the possibility that the Chinese government might directly intervene to reduce production in specific industries and control prices. The Financial Times (FT) projected that in the short term, the Chinese government would directly intervene by closing down outdated factories or reducing the production capacities of corporations.
FT interpreted, "The construction of a unified national market emphasized by Xi Jinping is part of these movements. This is an attempt to curb the distorting subsidy policies of local governments." The unified national market is a Chinese national strategy aimed at creating a consistent market order throughout China by unifying market infrastructure and supervision systems. Its purpose is to stabilize the economic system by eliminating unfair competition between regions.
According to reports, China has previously curbed overproduction in the steel industry from 2015 to 2018. However, at that time, it involved restructuring focused on state-owned enterprises and was accompanied by large-scale fiscal spending. Frederic Neumann, HSBC's chief economist for Asia, evaluated to FT, "This time, a much broader range of industries is involved and it will be a much greater challenge."