China, always having a different stand to other major economies, is not challenged by high inflationary pressures. Rather, it is seeing its slowest inflation levels in two years, the opposite of the most recent U.S. inflation data released overnight, which showed that consumer prices increased 4.9% in April, slowing after the Federal Reserve attempted to control inflation by raising interest rates 10 times in a row.
CPI inflation fell to 0.1% in April 2023 compared to market expectations of 0.4%, driven by the reopening of the economy as seen in Figure 1. However, core inflation, which exclude the volatile prices of food and energy, remained steady at 0.7% YoY. It is expected that CPI will increase by 0.3% during May. From a supply perspective, China’s producer price index, which measures prices paid by wholesalers, declined 3.6% compared to market expectations of 3.2% YoY after dropping 2.5% in the previous month.
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Figure 1: Trading Economics and National Bureau of Statistics of China
The Chinese economy is still in its early stages of recovery. Wang Tao, Chief China Economist at UBS said “China’s growth recovery has been weaker than expected so far. This may be dragging short-term portfolio inflows," However, the Central bank deputy governor Pan Gongsheng told delegates at the Lujiazui Forum that China has confidence, and the ability to safeguard the stability of the foreign exchange market. Additionally, as part of the latest effort to support the weakening yuan, a Chinese self-regulatory group supervised by the central bank has requested that the big state-owned banks reduce the interest rates on dollar deposits.
Today’s CPI reading will gauge the next potential moves of the USD/YUAN pair, as well as the Chinese government’s policy to boost the economy.
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