China's consumer prices fell for a fourth consecutive month in May, with the Consumer Price Index (CPI) down 0.1% year-on-year, matching declines from March and April and reinforcing fears of deepening deflation across the world's second-largest economy. Producer prices fell 3.3% from a year earlier, marking the sharpest decline since July 2023, as weak domestic demand and a prolonged price war in the auto sector intensified disinflationary pressures.
The May CPI decline was slightly better than economists' expectations of a 0.2% drop. On a monthly basis, consumer prices fell 0.2%, reversing a 0.1% gain in April. Core inflation, which strips out volatile food and energy prices, rose 0.6%, the highest level since January, according to data released Monday by China's National Bureau of Statistics.
Food prices declined 0.4% year-on-year, accelerating from a 0.2% drop in April. Meanwhile, factory-gate prices have remained in deflation for 32 consecutive months, dragged down by plunging wholesale costs in coal mining and energy sectors. Coal mining prices dropped 18.2% and oil and gas extraction fell 17.3% year-on-year in May.
"The price war in the auto sector is another signal of fierce competition driving prices lower," Zhiwei Zhang, chief economist at Pinpoint Asset Management, said. He added that falling property prices and sluggish consumer spending further contribute to the deflationary pressure. "Eventually China needs to rely on domestic demand to fight the deflation," Zhang said.
NBS Chief Statistician Dong Lijuan called for "more forceful and targeted stimulus measures to boost consumption" as current efforts have failed to revive internal demand.
The persistent economic weakness has been compounded by ongoing trade tensions with the U.S., though a temporary easing came in mid-May. A preliminary deal reached in Geneva led Washington to lower tariffs on Chinese goods to 51.1% from 145%, while Beijing reduced its duties on U.S. imports to 32.6%, according to the Peterson Institute for International Economics.
Despite this progress, relations remain strained. The U.S. has accused China of delaying rare earth exports, while Beijing has condemned recent American restrictions on Chinese student visas and semiconductor equipment exports. China's Ministry of Commerce stated Saturday that it would continue reviewing export permits for critical minerals, citing growing demand in sectors such as robotics and electric vehicles.
Vice Premier He Lifeng is expected to resume trade talks in London today with U.S. Treasury Secretary Scott Bessent, marking the second round of negotiations since the Geneva truce. Market participants are closely watching the meeting, along with potential new stimulus signals from the People's Bank of China (PBOC).
The offshore yuan strengthened to 7.18 per dollar Monday, rebounding from a two-day slide, while the Shanghai Composite rose 0.3% to close above 3,390 and the Shenzhen Component added 0.9% to 10,277, with traders hopeful for policy clarity.
