Data released by the National Bureau of Statistics on July 10th showed that the Consumer Price Index (CPI) in June rose by 0.2% year-on-year, with the increase narrowing by 0.1 percentage points, marking the lowest in the past three months. The core CPI, which excludes food and energy prices, remained unchanged at a year-on-year growth of 0.6%, reflecting continued weak overall demand. The Producer Price Index (PPI) saw its year-on-year decline narrow by 0.6 percentage points to 0.8%, reaching a new high since February 2023.

According to Xinhua News Agency, Premier Li Qiang chaired a symposium with economic experts and entrepreneurs on July 9th to listen to their opinions and suggestions on the current economic situation and the next steps for economic work. Li Qiang stated that the factors affecting economic growth are more complex than before, and it is necessary to put in significant effort to solve the difficulties and problems in the operation of the economy. Efforts should be made to achieve the expected targets for economic development for the year, further implement macro policies effectively, maintain momentum, and form a synergy to enhance the effectiveness of policy implementation, promoting sustained and healthy economic development.

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Demand Insufficiency Becomes Prominent

Despite a significant increase in pork prices, the year-on-year decline in food prices in June still widened, dragging down the year-on-year increase in the Consumer Price Index (CPI). Influenced by fluctuations in international commodity prices and insufficient domestic demand, the Producer Price Index (PPI) for industrial producers turned from an increase to a decrease on a month-on-month basis in June. However, due to the lower base in the same period of 2023, the year-on-year decline continued to narrow.

On a year-on-year basis, the CPI rose by 0.2%. Among them, food prices decreased by 2.1%, with the decline widening by 0.1 percentage points from the previous month. Within the food category, the price of fresh vegetables, which had increased by 2.3% in the previous month, turned to a decrease of 7.3%; the prices of tubers, fresh fruits, eggs, beef, mutton, and poultry continued to decline, with the decrease ranging from 2.3% to 18.6%; the price of pork increased by 18.1%, with the increase widening by 13.5 percentage points from the previous month.

Wang Qing, Chief Macro Analyst at Orient Gold & Credit Rating, stated that due to factors such as the increased supply of seasonal fruits and vegetables, the price of vegetables in June fell significantly, turning from positive to negative year-on-year, and the year-on-year decline in fruit prices also expanded. This offset the impact of the increase in pork prices for the month, contributing to the widened year-on-year decline in food prices, which is the main reason for the narrowed year-on-year increase in the CPI in June.

Furthermore, the "price war" in the automotive industry intensified in June, and the "6.18" promotion also led to a month-on-month decrease in the prices of household appliances and recreational durable consumer goods, offsetting the impact of factors such as the rise in mobile phone prices, keeping industrial consumer goods prices low for the month. With the approach of the summer vacation, the prices of services such as tourism and travel increased in June, but due to the high base of prices in the same period of the previous year, the year-on-year increase in service prices also slightly narrowed.

Wang Qing believes that the current low price level is due to factors such as the sluggish real estate market and the lingering effects of the pandemic, leading to low consumer confidence among residents. The impact of the declining growth rate of disposable income for urban residents should not be underestimated. Against the backdrop of stable supply of goods and services, insufficient consumer demand is the main reason for the significantly low price level at this stage. This is also the main reason why recent policy initiatives have been promoting the replacement of durable consumer goods such as cars, home appliances, and home renovations to stimulate consumption.

Regarding the trend of CPI in the next phase, Liu Aihua, spokesperson for the National Bureau of Statistics, recently stated at a press conference held by the State Council Information Office that, based on the current trends in food, industrial consumer goods, and service prices, the CPI is expected to continue to rise moderately. Looking at food, as seasonal fruits and vegetables are widely available, food prices will remain at a seasonal low. Regarding industrial consumer goods, the overall supply is sufficient, which is conducive to price stability. Looking at services, as the demand for services further recovers, service prices are expected to continue to rise. Overall, the CPI in the next phase will continue to show a moderate upward trend.

As for the PPI, in June, influenced by fluctuations in international commodity prices and insufficient market demand for some domestic industrial products, the PPI saw a month-on-month decline, while the year-on-year decline continued to narrow.From a year-on-year perspective, the PPI (Producer Price Index) fell by 0.8%, with the decline narrowing by 0.6 percentage points compared to the previous month. Among this, the price of means of production decreased by 0.8%, with the decline narrowing by 0.8 percentage points; the price of consumer goods also decreased by 0.8%, with the decline remaining the same as the previous month. From a month-on-month standpoint, the PPI shifted from a 0.2% increase in the previous month to a 0.2% decrease. Specifically, the price of means of production changed from a 0.4% increase to a 0.2% decrease; the price of consumer goods decreased by 0.1%, with the decline consistent with the previous month.

Industry analysis suggests that the main reason for the month-on-month decline in PPI in June is the recent acceleration in the supply of domestic industrial raw materials such as steel, cement, and coal. The upward price momentum observed earlier has significantly slowed down, with the steel industry experiencing a substantial month-on-month decrease in PPI. Additionally, influenced by insufficient domestic consumption, the PPI for consumer goods has continued to decline for nine consecutive months. However, due to the rapid decrease in the base figures from the same period last year, the year-on-year decline in PPI in June still showed a noticeable convergence.

Wang Qing stated that looking ahead, weak demand will continue to exert a strong suppressive effect on the recovery of industrial product prices. With the significant slowdown in the base figures from the same period last year and the ongoing adjustment in the real estate industry, the marginal upward momentum of industrial product prices is weak. The PPI for July is likely to be around -0.7%, with the narrowing trend of the decline clearly slowing down. As the price base increases, it will be challenging for the PPI to turn positive in the third quarter.

Liu Aihua, on the other hand, indicated that despite the uncertainty in international commodity prices, the gradual implementation and effectiveness of domestic large-scale equipment upgrades and consumer goods replacement policies will provide certain support for the prices in some industries. At the same time, as we enter the "peak summer" period, the demand for thermal coal is expected to boost, and coal prices may continue to rise. Overall, it is anticipated that the year-on-year decline in PPI will continue to narrow in the next phase.

Macroeconomic policies continue to strengthen.

In addition to inflation data, recent releases such as the Manufacturing Purchasing Managers' Index (PMI) also highlight the contradiction of insufficient demand.

The National Bureau of Statistics recently released the June manufacturing PMI at 49.5%, unchanged from the previous month; the non-manufacturing business activity index and the composite PMI output index were both at 50.5%, respectively 0.6 and 0.5 percentage points lower than the previous month.

Constrained by factors such as insufficient market demand, the manufacturing PMI has been below the boom-or-bust line for two consecutive months in June. The fading of the "May Day" holiday effect and heavy rainfall in many southern regions have led to a slowdown in the expansion of the service and construction industries, and the non-manufacturing business activity index also reached its lowest value of the year in June.

Enterprises feel the impact of insufficient demand quite strongly. A survey by the China Federation of Logistics and Purchasing showed that in June, the proportion of manufacturing enterprises reflecting insufficient market demand was 62.4%, an increase of 1.8 percentage points from May; the proportion of non-manufacturing enterprises reflecting insufficient market demand rose to over 62%, with a first-half average of 59.6%, significantly higher than the full-year average of 53.7% in 2023.

Zhang Liqun, a special analyst at the China Federation of Logistics and Purchasing, stated that we are currently at a critical stage in promoting a comprehensive economic recovery. It is essential to fully recognize the seriousness of market-guided demand contraction and its self-accelerating mechanism, significantly increase the counter-cyclical adjustment strength of macroeconomic policies, significantly enhance the pulling effect of government investment on corporate orders, stimulate continuous corporate production and investment activity, improve the employment situation, and accelerate the shift from demand contraction to demand expansion.At the aforementioned economic situation symposium, experts and entrepreneurs believed that since the beginning of this year, in the face of a complex external environment, China's economic operation has continued to improve and move in a positive direction. New drivers of growth have accelerated and strengthened, and these achievements have not come easily. Although there are still many difficulties and challenges, the effects of policies are continuously emerging, and positive factors in the market are gathering and increasing.

Li Qiang emphasized that to consolidate and enhance the positive trend of economic recovery, it is necessary to adhere to innovation-driven development, cultivate and strengthen new drivers of growth, and expand new growth spaces. It is important to adapt to new characteristics such as faster technological iteration, more disruptive innovations, and deeper cross-domain integration. The role of enterprises as the main body should be fully leveraged, and targeted policy support should be increased to promote more breakthroughs in key core technologies. It is also necessary to reform unreasonable institutional mechanisms to better mobilize the enthusiasm, initiative, and creativity of all parties, fully stimulate the innovation vitality of the whole society, organize and utilize China's vast innovative resources well, and continuously release tremendous innovative power.

Lian Ping, Dean of the Guangkai Chief Industry Research Institute, stated that in order to continue to consolidate the good momentum of the steady economic recovery, macro policies will continue to increase their intensity, and there is room for further repair of economic growth in the second half of the year. The summer vacation and the National Day holiday are expected to create good service consumption scenarios. At the same time, the intensity of consumption promotion policies is relatively large. Recently, the National Development and Reform Commission and four other departments issued the "Measures on Creating New Consumption Scenarios and Cultivating New Growth Points of Consumption," providing guidance for local governments at all levels to formulate consumption promotion policies in the second half of the year. In addition, the overall low base in the second half of last year, as well as the rebound of CPI and PPI, will drive the increase in consumer prices, which will also promote further recovery of consumption.

Wen Bin, Chief Economist of Minsheng Bank, also believes that it is highly likely that policies will be intensified in the second half of the year, and there is still a large room for fiscal policy to exert its strength. The implementation of a loose monetary policy is also expected, and the coordination between fiscal and monetary policies will be enhanced. Moreover, comprehensive deepening reform measures are also worth looking forward to.

Wen Bin stated that in the second half of the year, with the Federal Reserve's interest rate cut about to start, the room for China's monetary policy to be loose is expected to open up, and the probability of reserve requirement ratio cuts and interest rate cuts will increase. However, due to the still relatively weak effective demand, the space for monetary policy to play a role is limited. Therefore, the more critical aspect is to increase the intensity of fiscal policy to provide effective asset supply, guide market entities to increase leverage, and boost the confidence of market entities through deepening reforms and expanding openness. The intensity and effectiveness of these policies will determine the direction of China's economy in the second half of the year and for an even longer period.