China deflation gets Trump lift

FOR all China’s pointed criticism of the Iran war, it hasn’t been without advantage for the world’s second-largest economy.

President Xi Jinping has been wrestling for years with a pernicious foe: deflation.

The conflict has given prices at home a much-needed lift, one that Beijing must wish isn’t transitory. It’s a welcome development in an otherwise dour outlook.

Authorities should embrace the inflation that the Middle East tumult has produced. In this, China is largely on its own.

The central bank is, thankfully, signalling no hurry to crack down. The country is in a very different place from the United States, Europe and neighbours in Asia.

Interest rate increases are likely coming in Japan and the eurozone, while markets anticipate further tightening in Singapore.

The People’s Bank of China (PBoC) has the luxury of waiting – and hoping this bit of good economic news sticks.

Not everything is humming. Credit growth slowed in April, investment resumed its decline and retail sales fell short of forecasts.

Were it not for the climb in key price gauges, the next move in China’s borrowing costs might be down.

The PBoC has been a reluctant rate cutter, easing just once in 2025, in contrast to expectations of several reductions.

And this year, economists have reined in their calls for further juicing of the economy.

The strength of the yuan reflects comfort with the status quo; it’s the best-performing currency in Asia since the conflict in the Gulf began.

The energy shock generated by the war is most clearly seen in Chinese producer prices, which rose 2.8% in April from a year earlier. The clip was the fastest since July 2022, when the country was emerging from the pandemic.

As recently as February, factory prices were still enduring their longest stretch of declines in at least a generation. The climb in consumer prices was more modest, though also better than projected.

It may have taken an ill-advised assault on Iran by US President Donald Trump and his Israeli counterpart Benjamin Netanyahu, and the closure of the Strait of Hormuz, to get these two vital economic gauges headed in the right direction.

The benefit accrues to China, regardless.

Last week’s summit between Xi and Trump was faulted for its failure to produce a breakthrough on trade or a resolution in the Middle East, but it was still a worthwhile exercise.

The spurt in Chinese prices suggests that the world’s top two commercial powers are far from decoupled; blunders by one can produce a windfall for the other.

It would be a mistake to be too bullish on China.

Figures released on Monday show a domestic economy that’s losing momentum. In addition to lacklustre consumer spending, industrial production gained the least in three years in April.

Unemployment in a key demographic group – early career workers – edged up in March. Car sales retreated, as did purchases of home appliances and furniture.

This is very much a two-track economy: exports are doing well, despite trade tensions with the United States, and the battered real estate industry may finally be stabilising.

Neither Washington nor Beijing has an interest in rocking the global economic boat anymore.

Stability in relations is a decent outcome.

That gives China the opportunity to make the most of its prowess in shipping goods to the rest of the world; a stalemate in the Middle East helps address deflation.

Arguably, Chinese authorities weren’t aggressive enough in getting prices off the floor.

A few more rate cuts from the PBoC might not have sent inflation through the roof, but would have provided a stronger starting point.

It’s true that monetary policy can’t achieve everything, but it can make important contributions.

There was no sense of urgency before the war to raise prices. Contrast that with the early 2000s when deflation became Topic A at the US Federal Reserve (Fed).

In his memoir, former Fed chair Alan Greenspan describes it as a “rare disease”, but so corrosive that major steps could be justified to prevent it even if the broad economy was doing reasonably well.

In the end, shock therapy wasn’t required.

The PBoC is right to keep policy easy. With the headwinds underscored by this week’s data, there is zero case for clamping down.

China finds itself in a better place on prices, courtesy of Trump, even if the rest of the economy needs some work.

State media may depict the United States under Trump as a declining power, but its actions are still consequential enough to give Xi this much-needed boost. — Bloomberg