China Economy Shows Tentative Signs of Stability as CPI Ticks Up

China’s deflationary pressures eased slightly and data expected this week may show a pickup in credit demand, adding to a recent trickle of signs the nation’s economy is stabilizing.

(Bloomberg) — China’s deflationary pressures eased slightly and data expected this week may show a pickup in credit demand, adding to a recent trickle of signs the nation’s economy is stabilizing. 

Consumer prices increased in August — albeit by the slimmest of margins — following a decline in July, figures over the weekend showed, while the drop in factory-gate prices narrowed. Analysts expect officials this week will report a boost in loans last month as well. 

“Many data we’re seeing now shows that the economy’s slump may be slowing in the coming months,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. The nation’s export and manufacturing slumps have also eased a bit. “It will be more of a stabilization instead of a complete rebound.”

The world’s second-largest economy is trying to regain traction as an ongoing property crisis and weak confidence drag on its recovery, creating risk for the government’s annual growth target of about 5%. Grim July data had shown consumer prices tipping into deflation and monthly loans plunged to a 14-year low, with authorities then stepping up efforts to revive activity.

Those support efforts — including cuts to policy loan rates, mortgage rates and down-payment requirements for home purchases — are likely helping somewhat. Goldman Sachs Group Inc. economists estimate the impact of the government’s policies is equal to about 60 basis points, or 0.6%, of gross domestic product.

While efforts to restore market confidence have prompted brief rallies in Chinese stocks, investors continue to wait for stronger turnaround signs. The benchmark CSI 300 Index is down more than 10% from its January high this year. The yuan also fell to its weakest since 2007 against the dollar last week, though it gained on Monday.

Most recently, China said it would make it easier for insurance companies to invest in domestic stocks. The CSI 300 Index gained just 0.4% early on Monday, snapping a four-day losing streak. A measure of Chinese stocks listed in Hong Kong slid as much as 1.9% as trading resumed after record rainfall forced markets to be shut on Friday.

Global funds are holding the least Chinese stock positions since October, or back to where it was before the reopening rally took off in late 2022, according to a Morgan Stanley quant analysis last week.

More mid- and long-term loans to corporate borrowers are likely contributors to the anticipated rebound in credit demand for August, the China Securities Journal reported Monday, citing analysts. But the fact that many property easing measures only came into force at the end of the month may mean aggregate financing, a broad measure of credit, does not record a huge jump, according to ANZ’s Yeung.

There’s plenty of room for caution as analysts watch for clues of a potential bottoming out. 

Recent policies “may generate a short-term rebound in property transactions, but are insufficient to stabilize the property market,” the Goldman analysts wrote in a Sunday research note. They expect more easing, including rate cuts or measures to support the property market, if home sales continue to slide and growth slows further. 

There are also now signs that services growth is waning after being a major driver of the economic recovery earlier this year. That suggests more policy support may be needed to bolster household spending. 

Deflationary pressures aren’t gone entirely, either: The consumer price index remains well below the government’s official target of around 3% for the year. 

–With assistance from Shikhar Balwani and Nasreen Seria.

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