China’s factory-gate prices fell more than expected in July, while consumer prices stayed the same. This shows ongoing problems due to weak domestic demand and trade uncertainties. Consumer prices had no annual change, compared to a 0.1% rise in June, which was better than the anticipated slight decline. The core consumer price index (CPI) rose 0.8% year-on-year, the highest increase in 17 months, mostly because of non-food items. In contrast, food prices dropped by 1.6%. Monthly CPI went up by 0.4%, which is better than the 0.1% dip in June. The producer price index (PPI) fell by 3.6% year-on-year, matching June’s near two-year low and surpassing expectations of a 3.3% decrease.

Consecutive PPI Contraction

This is the 25th month in a row that the PPI has contracted, mainly due to fierce price competition in important sectors. The monthly PPI fell by 0.2%, improving from June’s 0.4% drop. Authorities are taking steps to tackle competition issues in areas such as automobile manufacturing. Extreme weather, like heatwaves and heavy rainfall, has worsened economic troubles. Some people think deflationary issues may ease, but others fear recovery could stay weak without strong demand-side support. Issues like a housing slump, unstable trade relations with the US, and a weak job market are contributing to this concern. The latest July figures show that China’s economy is still facing weak demand. Consumer prices are flat, and factory prices are dropping faster than expected. This suggests that deflationary pressures are still a problem.

Impact on Global Markets

The 25-month decline in producer prices is alarming for the industrial sector. It indicates continued price wars and excess supply in key industries like autos. This is a negative sign for companies involved in manufacturing and construction. We’ve seen this pattern before in late 2023 and early 2024, when China’s consumer price index fell for several months, marking the longest deflationary period since 2009. This suggests that the current weakness can persist without significant stimulus. In the coming weeks, we should be careful about investing in Chinese stocks, like those in the Hang Seng Index or FXI ETF. During the 2023 slump, the Hang Seng dropped below 15,000 points, a level not seen in over a year. Consider buying put options to protect against or profit from further declines. This weakness also affects global commodities that China relies on heavily. With factory activity slowing, we expect lower demand for industrial metals like copper and iron ore. This may create chances to short commodity futures or stocks of major mining companies. A slowing Chinese economy is bad news for its trading partners, especially Australia. In mid-2024, the Australian dollar fell significantly when dismal Chinese trade data was released. We should consider bearish positions in the AUD/USD pair as this trend is likely to continue. However, the rise in core inflation driven by services shows some strength in the consumer sector. Authorities are trying to curb “disorderly competition,” which could help stabilize prices. We need to monitor any developments from these government actions. With these mixed signals, betting on a clear direction is risky. A smarter approach may be to use derivatives to take advantage of increased volatility. Consider setting up straddles on key indices to benefit from significant price swings in either direction as this situation unfolds. Create your live VT Markets account and start trading now.

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