China's economy is facing a tricky situation, with consumer inflation hitting a near two-year high, while producer prices continue to deflate at an alarming rate. This is a complex issue, and it's important to understand the implications.
The Challenge of Reviving Domestic Demand
Despite the consumer price index (CPI) rising by 0.7% year-over-year in November, the highest since February 2024, producer prices (PPI) fell by 2.2%, extending the deflationary trend into its fourth year. This disparity highlights the difficulties policymakers face in stimulating domestic demand.
The core inflation rate, which excludes food and energy prices, remained stable at 1.2% year-on-year, indicating that the rise in consumer prices is not solely driven by these volatile factors.
Economists are concerned about the persistent deflationary pressure on China's economy, especially as the housing market downturn and weak labor conditions continue to dampen household spending. They argue that fresh policy measures are needed to boost demand and prevent further economic slowdown.
A Slowing Economy, Yet Meeting Growth Targets
Interestingly, despite the third quarter witnessing the weakest economic performance in a year, China seems on track to achieve its annual growth target of "around 5%" for 2025. This resilience is largely attributed to robust exports, as manufacturers have successfully redirected their shipments away from the U.S. market, navigating ongoing trade tensions and economic protectionism.
China's trade surplus surpassed $1 trillion in the first 11 months of 2025, setting a new annual record. This achievement showcases the country's ability to adapt and thrive in a challenging global trade environment.
Policy Priorities for 2026
In a recent Politburo meeting, the ruling Communist Party's top decision-making body, expanding domestic demand and rebalancing supplies were identified as key economic priorities for 2026. However, policymakers appear less inclined towards broad-based stimulus measures, favoring a more targeted approach.
Lisheng Wang, China economist at Goldman Sachs, suggests that policymakers may need to adopt a stronger easing rhetoric and implement more pro-growth policies in 2026 to counteract the negative impacts of the property sector and labor market.
Looking Ahead
Investors and economists are eagerly awaiting the annual Central Economic Work Conference, where policymakers will set the growth targets and policy priorities for 2026. The official figures will be released at the annual parliamentary meeting in March, providing further insights into China's economic trajectory.
This story is developing, and we will provide updates as more information becomes available. Stay tuned for the latest news on China's economic landscape.
