China’s Lacklustre Core Consumer Inflation Growth Sparks Deflationary Concerns

China’s recent core consumer inflation growth for July has raised concerns about the effectiveness of current stimulus measures in eradicating deflationary pressures. The lacklustre performance in key economic indicators has sent ripples through the financial markets, affecting the Hang Seng Index and China’s sovereign bond yields.

The persistent deflationary risk scenario has led to a record low of 2.12% in China’s 10-year sovereign bond yield. This downward trend reflects the ongoing challenges faced by the Chinese economy, despite piecemeal stimulus efforts by policymakers.

The Hang Seng Index has experienced fluctuations in recent weeks, trading below its 50-day and 200-day moving averages. Following a bearish trend, the index dropped by 8.7% in the past four weeks, signaling a shift from its previous bullish momentum earlier in the year.

While China’s headline consumer inflation for July showed a slight increase to 0.5% year-on-year, the uptick was mainly driven by seasonal factors such as food inflation. The core consumer inflation rate, which excludes food and energy products, actually decreased to 0.4% year-on-year, highlighting weak internal demand and ongoing deflationary pressures.

The financial markets have responded to the concerns of deflation by pushing China’s sovereign bond yields to record lows. However, interventions by the central bank have helped stabilize the situation, with yields recovering slightly from their lowest point.

Technical Analysis of Hang Seng Index

From a technical analysis perspective, the medium-term trend of the Hang Seng Index has turned bearish following a breakdown below key support levels. The index’s failure to sustain its previous bullish momentum has raised questions about its future performance, with a pivotal resistance level at 18,000 being crucial for a potential reversal.

China’s lacklustre core consumer inflation growth and the accompanying deflationary concerns have cast a shadow over the country’s economic outlook. The performance of the Hang Seng Index and China’s sovereign bond yields serves as a barometer for the challenges facing the economy, with policymakers being urged to take more robust and decisive action to counteract deflationary pressures and stimulate growth.