In July, China’s consumer prices remained unchanged compared to the previous year due to government efforts to control excessive competition, providing some relief from deflationary pressures. Analysts indicate that overcoming deflation could be a lengthy process, perhaps requiring stronger stimulus measures.
The Consumer Price Index (CPI) on a year-on-year basis for July showed no change, avoiding a forecasted slight decline. This marked the second consecutive month without negative readings, with expectations at -0.1% following a prior rate of +0.1%.
China’s Economic Indicators
On a month-on-month basis, the CPI rose by 0.4%, exceeding the anticipated 0.3% increase and reversing from the previous -0.1%. The Producer Price Index (PPI) decreased by 3.6% year-on-year for July, continuing a 34-month streak of declining factory-gate prices.
Authorities initiated measures to curb price wars impacting company profits and wages, but analysts note persistent underlying issues. Household expectations for future prices have diminished, and the GDP deflator has fallen for nine consecutive quarters, representing the most extended decline in decades.
The latest inflation data from China points to persistent economic weakness, even with consumer prices avoiding a decline. The fact that producer prices have now fallen for 34 consecutive months shows a severe lack of demand from factories. This combination suggests that any recovery will be slow and difficult.
Investment Implications
We see this environment as bearish for Chinese equities, as company profits remain under intense pressure. Derivative traders could consider buying put options on indices like the FTSE China A50 or the Hang Seng Index to hedge against or profit from a potential downturn. The ongoing price wars, which authorities are trying to control, will continue to squeeze corporate margins.
The prolonged factory-gate deflation directly signals weak demand for industrial inputs. We have already seen prices for key commodities like iron ore slip below $100 per tonne this year, reflecting this poor industrial appetite. Shorting commodity futures tied to industrial metals or buying puts on related ETFs may be a prudent strategy.
This economic pressure makes further monetary easing by Beijing more likely, which would weigh on the yuan. The offshore yuan has already tested the 7.40 level against the dollar several times in 2025, signaling market expectations for stimulus. We believe shorting the yuan against the US dollar remains a viable trade in the coming weeks.
We must remember that these figures exist within a broader context of economic strain. The property sector’s troubles, a crisis that has been unfolding since we saw the major defaults of 2021 and 2022, continue to harm confidence. Furthermore, the economy-wide GDP deflator has been falling for nine straight quarters, the longest such decline in decades.
