SCIO briefing on China's economic performance in Q1 2025

21st Century Business Herald:

We have noticed that the CPI in March fell year on year, but the core CPI rebounded significantly. What is the reason for this trend? How would you assess the current price trends? This year's two sessions set the CPI target for this year at around 2%. What is your outlook on the CPI trend in the coming months? Can the annual target be achieved? Thank you.

Sheng Laiyun:

Thank you for your questions. I know everyone is very concerned about price trends because prices relate not only to macroeconomic inflation levels but also to people's quality of life. I would like to address three points regarding price trends.

First, the price decline in March was mainly due to a seasonal decline in the prices of certain commodities and the short-term impact of lower international crude oil prices. The CPI in the first quarter fell 0.1% year on year and declined 0.1% year on year in March, which was 0.6 percentage point lower than in February, with a month-on-month decrease. There were three main reasons behind this trend. One is the seasonal decline in demand for agricultural products after the Spring Festival. Coupled with this year being a warm winter, temperatures rose after the festival, resulting in an abundant supply of fruits and vegetables, causing food prices to fall. In March, food prices fell 1.4% month on month, contributing 0.24 percentage point to the month-on-month CPI decline. With the overall CPI falling 0.4%, about 60% of this decline can be attributed to the seasonal decline in food prices. The second influencing factor was the post-Spring Festival decline in transportation services, with seasonal drops in tourism costs and airfares. In March, airfares fell by 11.5% month on month, and travel prices declined 5.9% month on month, contributing to a 0.13 percentage point drop in the CPI. The third factor was mainly the decline in international crude oil prices, which led to adjustments in domestic gasoline prices. Gasoline prices fell by 3.5% month on month in March, contributing to a 0.12 percentage point drop in the CPI.

Second, we should take a comprehensive and accurate view of the current low-level price trends. In the past two years, both the CPI and the PPI have remained at low levels. This trend stems from complex changes in the domestic and international macroeconomy, as well as the ongoing effects of China's economic transformation and shift toward new growth drivers. Now, China's economy is at a critical stage of upgrading its consumption structure and transitioning to new growth drivers. Some traditional industries and traditional growth drivers are declining, and certain sectors are oversupplied. Excess capacity can be cleared from the market through price adjustments. In addition, new growth drivers are emerging. These new growth drivers are often scarce in the market, with strong demand, leading to upward price pressure. However, overall, the price increases driven by new growth drivers still cannot offset the downward pressure brought by declining traditional growth drivers, and prices remain generally at a low level. For example, in recent years, the continuous adjustment in the real estate sector has led to declining prices for related steel and building materials. From 2016 to 2019, the average price increase in the ferrous metal smelting and rolling processing industry, represented by steel, was about 9%, while the average increase from 2000 to 2024 was only 0.9%. Therefore, adjustments in related industries will have a series of effects on the prices of associated products. We need to take a comprehensive and objective view of recent low level of prices. Price fluctuations in China have distinct cyclical and structural characteristics.

Third, we have taken multiple measures to promote reasonable price increases. High prices will affect consumer spending and increase the cost of living. However, prices that are too low are also not good, as they affect business revenue and profits, which in turn impact income and employment. Therefore, keeping prices within a reasonable range is crucial. This year's two sessions clearly stated that we should strive to keep the overall price level within a reasonable range. To this end, relevant departments have introduced a series of policies and measures to promote price recovery. On the one hand, we are expanding domestic demand. On the other hand, we are coordinating the relationship between deepening supply-side structural reform and expanding domestic demand. At the same time, we also regulate market order, reform the market pricing mechanisms, and prevent excessive internal competition. For example, we're promoting the development of a unified national market. These measures will help bring prices to reasonable levels. Looking at the March price data, we can see that relevant policies are already taking effect. The CPI fell 0.1% year on year in March, compared to a 0.7% drop in February, narrowing by 0.6 percentage point. The core CPI, which excludes energy and food prices, rose 0.5% in March after falling 0.1% in February. This demonstrates that as the economy rebounds and aggregate demand warms up, the effect of policies promoting reasonable price increases will continue to emerge. Thank you.