Dah Sing Financial: The reflection of anti-involution policies takes time, expects inflation in mainland China to remain flat this year

Dah Sing Financial Group's Chief Economist and Strategist, Wen Jiawei, stated that inflation in the mainland continues to be sluggish, with a slight improvement in the deflation of production prices. In August, the Consumer Price Index (CPI) in the mainland fell by 0.4% year-on-year, the lowest since February this year, a decline greater than the market expectation of 0.2% and the flat performance in July. The year-on-year decline in food prices expanded by 2.7 percentage points to 4.3%, the largest drop since January last year; among them, the price of fresh vegetables saw a significant decline of 15.2%, the largest drop since November 2022; the decline in egg and pork prices also widened significantly. Non-food prices rose by 0.1% year-on-year, with the price increase of other goods and services expanding to 8.6%; the increases in medical services, household appliances, and durable consumer goods also widened; the decline in transportation and communication prices narrowed.

Overall, the Consumer Price Index in the mainland shifted from flat to falling in August, mainly due to the high increase in food prices during the same period last year, which led to a higher base and an expanded decline in food prices this year, dragging down the overall consumer prices. On the other hand, non-food prices only saw a slight increase, failing to offset the decline in food prices. Some consumer goods prices benefited from consumption promotion policies, and car prices were also supported by anti-involution policies, which narrowed the decline. U.S. tariff policies may lead some exporters to shift to domestic sales, and as the effects of anti-involution policies take time to reflect, it is expected that prices will remain weak in the short term. The bank expects inflation to remain flat this year.

Additionally, the year-on-year decline in the Producer Price Index (PPI) in the mainland narrowed by 0.7 percentage points to 2.9% in August, marking the first narrowing since March this year, in line with market expectations. The coal mining and washing industry, as well as the petroleum, coal, and other fuel processing industries, experienced significant declines, but both saw a narrowing of their declines; the increase in the non-ferrous metal mining and selection industry expanded. Looking ahead, mainland exports are likely to be affected by U.S. tariff policies, and with international oil prices expected to remain weak in the short to medium term, this may continue to exert pressure on overall production prices. The mainland authorities have already been vigilant about price competition driven by involution, and the governance of domestic anti-price competition may yield results at the production price level; at the same time, continuing to develop emerging industries and phasing out outdated production capacity may help alleviate the downward trend in production prices. The bank expects the year-on-year decline in production prices to remain above 2% in 2025