China Inflation Data Highlights Economic Challenges for 2025

China’s Inflation Data Casts Doubt on 5% Growth Target

China’s economy faced further scrutiny on Thursday, January 9, with inflation data drawing significant investor interest. There were no positives for investors to take from December’s data.

China’s annual inflation rate softened from 0.2% in November to 0.1% in December. Producer price trends continued signaling weak demand, falling 2.3% year-on-year in December. While improving marginally from November’s 2.5% drop, deflationary pressures persisted, raising concerns about China’s ability to meet its 5% growth target.

December’s inflation data mirrored the recent Caixin Manufacturing PMI numbers, underscoring pricing challenges in a competitive environment. Manufacturers reported a fall in average selling prices for the first time since Q3 2024 despite higher input prices.

Brian Tycangco, an editor and analyst at Stansberry Research, commented on the inflation data:

“The deflation threat is real and growing in China. Beijing should take this latest data as a cue to act more decisively on stimulus.”

The urgency for additional stimulus has intensified since last year’s first round of policy measures. China’s Caixin Composite PMI dropped from 52.3 in November to 51.4 in December amid fears of a US-China trade war.

Economists Urge Shift from Export-Driven Economy

Donald Trump’s Presidential Election victory has cast a brighter spotlight on China’s economic vulnerabilities. Rising protectionism and the threat of universal tariffs question whether China’s export-reliant model is sustainable.

Natixis Chief Economist Alicia Garcia Herrero remarked on China’s dependence on industrial production and trade, stating,

“In the November data, you had industrial production, value-added production, growing even higher than in October, with retail sales growing at only half that of production. So, what are you going to do with all of this production? Who are you going to export to? The problems are probably becoming more acute because protectionism is on the rise, and China is not changing its model. I think 2025 is time for change, and China needs to change very soon, or the year might end up quite badly.”

Notably, further stimulus measures targeting consumption and domestic demand could be crucial steps toward a more balanced growth model.

In December, China’s President Xi Jinping committed to achieving the 14th Five-Year Plan, saying,

“We will accomplish the 14th Five-Year Plan and implement more proactive and effective policies. China’s economy face new situations, challenges.”

The Plan emphasizes GDP growth, technological self-sufficiency, environmental protection, and social welfare. One key component of the Plan underscored the need to target the domestic economy by implementing frameworks to expand domestic demand effectively and boost consumer spending.

Labor Market and Consumer Sentiment Crucial to Boots Consumption

Global trade uncertainties have impacted China’s labor market. In December, service providers cut staffing levels for the first time since August, while manufacturing employment contracted for the fourth consecutive month.

Deteriorating labor market conditions have impacted consumer sentiment, which fell to near historical lows in Q3 2024. The pullback in consumer sentiment underpins the need for stimulus measures targeting households to boost consumption.

A lack of household-focused stimulus may limit the effectiveness of China’s 2024 measures to bolster the economy. More importantly, such a scenario would further expose China’s economy to rising protectionism and a potential trade war with the US.

Dr. Wang Zhe, Senior Economist at Caixin Insight Group, recently gave insights into the year ahead, saying,

“The external environment is expected to be more complex this year, requiring early policy preparation and instant response. In addition, future policy efforts should focus more on increasing household income and improving people’s livelihoods, with particular attention paid to increasing socially disadvantaged groups’ ability and willingness to spend.”

How Did the Markets React to the Inflation Data?

The Hang Seng Index briefly fell to a morning low of 19,231 before climbing to a high of 19,406. Hopes for convincing stimulus measures supported a recovery.

On Thursday, January 9, the Hang Seng Index advanced by 0.29% to 19,336.

Meanwhile, mainland China’s markets struggled for direction. The CSI 300 edged 0.08% higher, while the Shanghai Composite fell 0.18%, highlighting domestic concerns about the economy.

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