China Economy:Deflationary pressures set to ease but impulse remained weak

Deflationary pressuressetto ease but impulseremained weak Frank Liu(852) 3761 8957frankliu@cmbi.com.hk China continues to experience mild reflation, primarily driven by foodprices andlower base effect. Core CPIremained unchangedas thesurge in gold prices,alongside a rebound in discretionary items such as footwear and apparel,constituted the primary drivers, while durable goods including vehicles, telecomequipmentand home appliances remained subdued. PPI edgeddownon ahigher base last year, though its MoM reading registered a second consecutivegain for the first time since 2023. Seasonal factors lifted pricesin heat-relatedindustries such as coal processing and heat production, while reboundsininternational non-ferrous metals prices pushed up costs in associated sectors.We expect deflationary pressures to ease in2026, but the momentum shouldremain weak.We believe the surging goldprices havemasked the underlyingfragility of the 2025 reflation trend, while muted durable-goods prices andconsumer demand cast doubt on the sustainability of a supply-pull reflation. Weexpect the CPI and PPI to reflate from 0% and-2.7% in 2025 to 0.7% and-0.5% in 2026. Bingnan YE, Ph.D(852) 3761 8967yebingnan@cmbi.com.hk Food price drove the rebounding CPI.China’sCPI YoYreboundedto0.7% in Nov from 0.2% inOct,in line withmarket expectation, marking itsstrongest reading since early 2024.Nonetheless, CPIdipped to-0.1% inNov from0.2% inOct insequential terms.Foodpricewas the key driver,climbing 0.5% MoM in Nov, with YoY momentum turning positive to 0.2%from-2.9%. Vegetable price notably rebounded by 7.2% MoM, boostingheadline CPI by 0.17 ppt, while pork price saw another drop at-2.2% in Nov.Vehicle fuelpricedropped 2.2%MoM due tofallingcrude oil price.Weexpect the CPI torecover to0.8% YoYin Decdue to lower base last yearand reflating food price especially vegetables, while high frequency dataindicated the pricesofporkand vehicle fuel remained subdued. Core CPIstayed elevated.Core inflationstayed flat at 1.2%YoYinNov,butdropped 0.1%MoM.Price of durable goods remained subdued, as homeequipment, telecom equipmentand vehicles dropped 1%, 0.8% and 0.1%MoM respectively. Discretionary goods including clothing and footwear havebeen particularly strong recently, rising 0.8%and 0.5% MoM in Nov.According totheNBS, gold jewellery remarkably rose to 58.4% YoY in Novfrom 50.3%, contributing at least 0.4pp to core inflation.Service pricedropped to-0.4% MoM in Nov, astourism pricesharplydeclinedby5.7%.Other services were lethargic as education and rent dropped 0.1% and 0.2%MoM while express, telecom and homeservice remained flat. Medicalservice has been reflating since Apr, expanding 0.3% MoM in Nov, reflectingthe impact of medical service price reforms. PPI growth edged down YoY but continued to expand MoM.YoYcontractionof PPIedged downto-2.2%in Nov from-2.1%due to higherbase last year, missing the market expectationat-2%.The MoM growthincreased for a second month,rising 0.1%.PPI ofmining industrieswas themajor driver, rebounding 1.7%MoMin Nov, driven by the4.1% and 2.6%growth ofextraction of coal and non-ferrous metals,whilethe mining ofcrude oil and gasdeclined 2.4%.PPI of raw material sectors dropped 0.2%while processing sectors rose 0.1%. Price of paper manufacturing and non-ferrous metals processing rebounded by 1.4% and 2.1%. NBS officialspointed out that YoY price contraction has continued to narrow in major anti-involution sectors, including photovoltaic equipment, lithium batteries andNEVs.Downstream sectors remained subdued, as PPI of consumer goods stayed flat at 0% MoM.Non-durable goods rebounded, while durable goodsfurther dropped 0.2% in Nov as auto declined by 0.1%. Deflation pressures are set to ease, but the reflation momentumremains weak.We expect the CPI and PPI to reflate from 0% and-2.7% in2025 to 0.7% and-0.5% in 2026. CPI will be driven by rebounding food price,narrowing decline of energy price and moderately recovering services price,while PPI will be driven by easingmonetary cycle intheUSand China, fiscalexpansionin theEUandJapan, and continuous anti-involution effortsfromChina. However, the rise in gold prices may have masked the underlyingfragility of the reflation trend in CPI, as CPI excluding the impact of gold pricemay have been close to negative.The subduedpricesofdurable goods alsoreflected soft consumer demand, casting doubt on the durability of a supply-pull reflation. Source: Wind, CMBIGM Source:Wind, CMBIGM Source: Wind, CMBIGM Source: Wind, CMBIGM Source:Wind, CMBIGM Source: Wind, CMBIGM Source:Wind, CMBIGM Source:Wind,CMBIGM Source: Wind,CMBIGM Source: Wind, CMBIGM Source: Wind,CMBIGM Source: Wind, CMBIGMestimates Source:Bloomberg, CMBIGM Source:Wind, CMBIGM Source:Wind, CMBIGM Source:Bloomberg, CMBIGM Source:Wind, CMBIGM Source:Bloomberg, CMBIGM Source:Wind, CMBIGM Source:Bloomberg, CMBIGM Source:Wind,CMBIGM Source:Bloomberg, CMBIGM Disclosures& Disclaimers Analyst Certificatio