Higher CPI, lower PPI require nuanced understanding

The National Bureau of Statistics and the People's Bank of China released March inflation and financial data on April 11, which led to some concern and confusion in the market. On the one hand, the market is worried that the economy is entering a period of deflation, or decrease in the general price level of goods and services, as China's consumer price index only increased 0.7 percent year-on-year last month while the producer price index was down 2.5 percent. On the other hand, the market is confused about the coexistence of low prices and strong money supply growth, as China's broad measure of money supply, or M2, increased 12.7 percent year-on-year in March, with new yuan-denominated loans and the country's increment in aggregate social financing far exceeding market expectations.

It can be interpreted that the current declining trend in price growth is not deflation, but is related to base effects, the impact of noneconomic policies on business confidence and a decrease in peoples' risk appetite after the COVID-19 pandemic. Prices are not continuously falling, nor are they in a tight monetary environment. The country should refrain from adopting a deluge of strong stimulus policies. Instead, it should boost confidence and reshape incentives for local governments, entrepreneurs and residents.

Currently, the Chinese economy is still on track for recovery, with indicators such as the purchasing managers index and social financing reflecting a positive economic recovery trend. China's services sector has performed better than the manufacturing industry and domestic demand has recovered better than external demand. Of course, economic recovery still faces hidden risks and the foundation for recovery is not yet solid, including the impact of global economic downturns and anti-globalization and weak consumption of durable goods as well as the real estate sector still not having fully recovered to pre-pandemic levels.