China’s recovery from inflation is likely to stay low. In January, the Consumer Price Index (CPI) is expected to drop compared to late 2025. This drop is mainly due to base effects and the timing of the Lunar New Year. Experts predict that the average CPI inflation will rise to 0.9% for the year. Additionally, the decrease in producer prices is expected to slow down because of rising commodity prices. It’s forecasted that CPI inflation will fall in January for the reasons mentioned. Even though the annual average may rise to 0.9%, inflation should still be low compared to past years. The expected easing of annual declines in producer prices will likely result from higher commodity prices. This trend suggests mild reflation within the Chinese economy as it continues to face economic challenges.

Chinese Economic Outlook

With the January consumer price data expected to show a decline compared to late 2025, we anticipate ongoing weak domestic demand in China. This is largely due to timing effects from the Lunar New Year, reinforcing a fragile economic recovery. Derivative traders should approach with caution regarding bets on a quick Chinese recovery in the first quarter. The low inflation outlook suggests that the People’s Bank of China may not tighten monetary policy and could even opt for further easing. Recently, the PBoC kept its one-year loan prime rate steady at 3.45% for most of the second half of 2025, indicating a pro-growth approach. This environment might continue to weigh on the yuan, making call options on the USD/CNH pair an interesting strategy to consider in the coming weeks. While the drop in producer prices is expected to slow, this change seems driven by rising global commodity prices, not a boost in domestic orders. For example, iron ore futures on the Dalian exchange have risen nearly 4% since the start of 2026, which could pressure margins for manufacturers if they can’t pass on these costs. This situation prompts caution regarding futures on industrial metals that depend heavily on strong Chinese consumption.

Investment Strategy Considerations

The forecast of just 0.9% average inflation this year indicates limited growth in corporate earnings and consumer spending. The Hang Seng Index also faced slow performance, struggling with significant resistance levels in 2025 amidst similar economic issues. It may be wise to consider protective put options on China-focused ETFs to hedge against potential downside risks if economic data continues to disappoint. Create your live VT Markets account and start trading now.

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