China’s reflation can worsen its demand problem

ZTO Express (Cayman)

18/05/2026 03:02

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Ka Sing Chan

HONG KONG, May 18 (Reuters Breakingviews) - Be careful what you wish for. China wants to reinflate prices, but the oil shock from the Iran war is now doing the job in the worst possible way. Costlier energy will sap domestic demand, slow the shift to consumer-led growth and, worse, squeeze the country's $4 trillion export engine as importers’ currencies weaken.

President Xi Jinping’s planners have made steering “general price levels back to positive territory” a top economic goal this year. The choke on energy supply through the Strait of Hormuz has provided an unexpected assist, with factory-gate inflation finally turning the corner. After 41 consecutive months of contraction, the producer price index edged into positive territory in March, and the gauge climbed another 2.8% in April, led by oil and fuel processing costs. Consumer prices are also picking up. Headline CPI rose 1.2% year-on-year.

Despite China's healthy strategic energy stockpiles, global supply chain realities mean both inflation measures have run away from market expectations. Economists expected slack demand and excess capacity within China would slow down the oil shock from passing through. However, after years of margin compressing, firms simply ran out of room to absorb the hit.

Fuel, for example, makes up to 30% of road transport costs, according to the National Development and Reform Commission. And deliverers such as ZTO Express 2057.HK, which provide the backbone of the nation’s e-commerce, have been raising fees on customers.

A bigger threat is that these price pressures further weaken domestic demand, which still shows little sign of broad price recovery: even in an extreme scenario where Brent crude is stuck above $120 a barrel for a prolonged period, economists at China Merchants Bank reckon consumer inflation would only hover close to the government’s 2% target. Pork prices fell another 15.2% year-on-year in April, underscoring weak household spending. Retail sales remain weak, growing only 1.7% in March.

That leaves manufacturers with little choice but to lean even more heavily on overseas buyers for their goods. Exports surged 14.1% in April, nearly double what economists had pencilled in, per a Reuters poll. The snag is that China's global customers will also be grappling with weaker domestic demand as a result of high energy prices. Worse, the BIS Currency Basket Index, which tracks the yuan's strength against 13 currencies of major trading partners, has strengthened 2.2% since the start of March, raising the cost of Chinese wares. Persistent deflation may be a lesser evil than bad inflation.

CONTEXT NEWS

China’s producer price index increased 2.8% from a year earlier, National Bureau of Statistics data showed on May 11, exceeding a 1.6% rise forecast in a Reuters poll. The gauge had reversed ​a 41-month declining streak in March when prices rose 0.5%.

The consumer price index rose 1.2% year-on-year in April versus a 1% increase ⁠in March, driven mainly by price swings in gasoline and gold jewellery, according to NBS. Economists polled by Reuters had expected a 0.9% rise.

The Iran war has pushed up China's sagging producer and consumer prices https://www.reuters.com/graphics/BRV-BRV/zgpolxmebvd/chart.png

(Editing by Una Galani; Production by Aditya Srivastav and Ujjaini Dutta)

((For previous columns by the author, Reuters customers can click on CHAN/ KaSing.Chan@thomsonreuters.com))