China plans policy stimulus in China

China’s consumer inflation slowed in March, as producer prices continued to decline, creating space for the central bank to ease monetary policy and support the country’s economic recovery. According to the National Bureau of Statistics, the consumer price index (CPI) rose by 0.7% year-on-year, falling short of economists’ expectations for it to remain unchanged. Meanwhile, the producer price index (PPI) declined by 2.5% in March, following a 1.4% decrease in February.

Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd, said that the Chinese economy was “still running below its potential,” suggesting there was room for fiscal and monetary policies to boost growth further. Despite the post-Covid recovery of the economy, domestic demand in China remains weak, indicating the need for more supportive policies to make the rebound led by consumption more sustainable. Household sentiment regarding income and job prospects in China has not fully recovered to pre-pandemic levels.

Falling car prices contributed to the slowdown in CPI, with petrol car prices falling 4.5% from a year ago, according to NBS analyst Dong Lijuan. Speculation that policy rates may be lowered is gaining more traction after the latest inflation report. Zhou Hao, chief economist at Guotai Junan International Holdings, believes policymakers must focus on the “transmission process,” guiding banks to lower mortgage rates significantly to help home buyers and property developers.

The Chinese government has been monitoring price changes in key commodities and implementing measures to maintain stability. These measures include purchasing pork for reserves, cautioning futures companies against exaggerating iron ore price increases, and expressing concerns about the rapid rise in sugar costs. The declining producer prices could exacerbate challenges for industrial companies in China, impacting their profitability further. The PBOC unexpectedly lowered the amount of cash banks must keep in reserve last month, giving lenders more cash to disburse loans.

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