China's CPI effectIn July 2023, the year-on-year decrease in the Consumer Price Index (CPI) for residents in China was 0.3%, while the month-on-month increase was 0.2%. The Producer Price Index (PPI) for industrial producers in China showed a year-on-year decrease of 4.4%, and a month-on-month decrease of 0.2%.
The cyclical fluctuations in commodity prices similarly affect the year-on-year analysis of PPI, while the significance of the month-on-month change might be more important. Excluding base effects, the real economic scenario depicted by July's prices indicates a strong demand for services and lower-than-expected industrial production.
Amidst the backdrop of strong overseas commodity prices, July's domestic PPI continued to decline month-on-month, reflecting the persistently weak pattern of actual industrial production demand.
Looking at different industries, the prices in oil and gas extraction, nonferrous metal, and smelting and processing industries shifted from decline to increase month-on-month due to the impact of rising international oil and nonferrous metal prices. However, industries more reflective of domestic industrial production demand, such as coal maintained negative growth month-on-month, contributing to the negative PPI reading. This aligns with the weak construction industry PMI data for July.
In downstream industries, computer manufacturing and smart consumer equipment manufacturing recorded month-on-month increases, indirectly verifying the resilience of China's middle and high-end manufacturing exports. Recent export research indicates that some companies still have confidence in overseas demand and their competitive advantages for the second half of the year, and the negative impact of trade frictions on exports is gradually diminishing
As expected, the year-on-year inflection point for PPI occurred in July, indicating a potential price increase for industrial products. Historical data show that PPI inflection points generally lead those of industrial product inventories, and PPI trends align with the trends in inventory cycles, which indicates a strong indication of inventory cycles. Experience suggests that during the phases of passive destocking and active restocking, industries tend to experience an upward trend in industrial production and profitability. The market expects that after the bottom of the inventory cycle, the economy will undergo a cyclical recovery.
However, there are two distinct features of this inventory cycle. First, the elasticity of real demand during this inventory cycle is limited this year since China's inventory cycle is essentially a shadow of the real estate cycle. Second, PPI as an indicator of domestic industrial demand might experience a phase of "failure".
