China's Producer Prices Record Historic Decline: Endless Price War — PPI -3.6% Exposes Weaknesses in Chinese Manufacturing

1. The Shocking Figure of "3.6%"

On the morning of July 9, the National Bureau of Statistics announced that the PPI for June was -3.6% year-on-year. This figure was significantly below market expectations (-3.2%) and fell into a deep negative territory not seen since July 2023 (-4.4%). The deflation phase has now persisted for 33 consecutive months. Although the CPI slightly rose to +0.1%, it represents a mild "superficial recovery," with the tug-of-war between excess supply and stagnant domestic demand continuing.reuters.combotanwang.com

2. What Pushed Down the PPI?

• External Demand: The additional tariff enhancements by the U.S. administration have directly hit export-oriented steel and chemical sectors.

• Internal Demand: The real estate recession and the financial strain on local governments have slowed infrastructure investment.

• Cost: While raw material markets have stabilized, high logistics costs are squeezing gross margins.

Hu Weijun from Macquarie warns that "without policy stimulus, escaping the deflationary spiral is impossible."news.fx168news.com

3. The "Price Cut Spiral" Theory Spreading on Social Media

On platforms like X (formerly Twitter) and Weibo, posts about the "3.6%" figure have surged.

Posts illustrating the cycle of "price cuts → profit compression → wage suppression → demand decline → further price cuts" recorded over 10,000 reposts in a day, indicating that deflation concerns are permeating the general public.

4. Immediate Market Reactions

Immediately after the announcement, the Shanghai Composite fell by 0.4% compared to the previous day, with steel and material-related stocks being sold off, while real estate stocks saw a slight rise in anticipation of benefits from rate cuts. The yield on China's 10-year government bonds fell by 5 basis points to 3.02%. The yuan softened to as low as 7.34 per dollar. The Hang Seng China Enterprises Index also declined but showed resistance in the afternoon due to policy expectations.bloomberg.com

5. Government and People's Bank Response Scenarios

Sun Zhiqiang from the think tank Zhongcheng Research points out the need for a "two-pronged" approach of fiscal expansion and regulatory easing, predicting that "the issuance of additional government bonds at the September NPC extraordinary session will be a critical point."

6. Industry-Specific Impacts and Bright Spots

• Heavy Industry & Materials: Profit margins are notably declining, with crude steel prices down 11% year-on-year.

• New Energy Vehicles: Relatively stable due to continued tax reductions and strong overseas sales.

• High-Tech: Supported by subsidies for domestic semiconductor production.

Meanwhile, daily goods and food are seeing "early discounting" to adjust inventories, with wholesale prices showing signs of stabilization.

7. International Implications

Japanese, German, and Korean companies exporting materials and equipment to China face price reduction pressures, leading to margin compression across the supply chain. Goldman Sachs estimates a 1.2 percentage point downward effect on the weighted average of global PPI. The IMF, in its annual report, analyzes that "China's persistent manufacturing deflation contributes to global cost-push suppression while weighing on global growth."

8. Impact on Citizens' Lives and the "Price War"

According to a reporter who visited electronics retailers in Beijing, 55-inch 4K TVs have dropped to 1,499 yuan. However, many voices, such as those of 30-something office workers, say, "Without a pay raise, I'll hold off on replacing it."

In online food malls, "buy one, get one free" has become the norm, with suppliers prioritizing market share over profits, leading to a vicious cycle of further PPI declines.

9. Key Points to Watch Going Forward

1. Trends in foreign capital inflow through the July Bond Connect

2. Official announcement of the State Council's guidelines for correcting "excessively low price sales"

3. Revisions in public utility fees such as electricity and railways

4. Redefinition of "high-quality development" at the October Fifth Plenary Session of the Communist Party

5. Risks of additional tariffs related to the U.S. presidential election

10. Conclusion: Beyond Deflation to "Value Rediscovery"

The negative 3.6% figure signifies not just a drop in prices but also a process of **"re-evaluating the value commensurate with the price."** The government must hasten the shift from reliance on low prices to technology and branding, while companies need to create added value to provide room for wage increases. The key to emerging from the deflation tunnel lies in demand creation that involves "quality" over "quantity." A triadic reform in awareness among policies, companies, and individuals will be the watershed determining whether the next growth narrative can be drawn.