China’s zero-inflation troubles getting harder to ignore
China’s deflation troubles became harder to spin with news that factory prices fell for a 27th straight month in December and that consumer price changes are effectively zero even before Donald Trump’s trade war begins.
The 2.3% drop in wholesale costs year on year and negligible 0.1% rise in consumer prices will only intensify speculation about why President Xi Jinping’s team isn’t acting more assertively to boost confidence. That’s nowhere more true than in China’s bond market. Yield dynamics suggest traders have never been so pessimistic on Beijing’s ability to avoid so-called “Japanification.”
This week, the gap between 10-year sovereign Chinese debt yields and comparable US securities reached an unprecedented 300 basis points. That’s despite a barrage of stimulus efforts from Team Xi. Investors fear China is about to outdo its record deflationary run in the late 1990s amid the Asian financial crisis.
The economic subtext is Trump’s return to the US presidency 11 days from now. Expectations that Trump will hit the ground running on tariffs and tax cut proposals have the US dollar under strong upward pressure. That has Team Xi and the People’s Bank of China struggling to stop the yuan from weakening past the 7.2 per dollar level.
There’s some good news rolling in, too. Factory activity, for example, seems to be holding up, expanding for three straight months now. But positive economic drivers remain limited as a wildly uncertain 2025 gets under way.
“Recent economic data stabilized, but the momentum is not strong enough to generate upward pressure on consumer prices yet,” says Zhiwei Zhang, chief economist at Pinpoint Asset Management.
Even before Trump’s return, weak domestic demand has Chinese companies cutting
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