China: Cost-driven reflation and narrow profit gains – Standard Chartered

Standard Chartered analysts Carol Liao and Moriarty Lam argue that China’s reflation remains largely cost-driven, with industrial profit recovery concentrated in AI- and oil-related sectors. They highlight that domestic demand continues to lag supply, creating a persistent imbalance. They expect accommodative policies and a low-inflation, low-yield regime to stay in place as rebalancing takes time.

Reflation led by AI and energy sectors

"While we agree that productivity gains are driving China’s supply capabilities, domestic demand has lagged, creating a persistent supply-demand imbalance."

"However, our analysis suggests that recent reflation has been driven primarily by higher global commodity prices."

"Industrial profit recovery has been concentrated in the AI- and oil-related sectors, while industries most frequently associated with ‘overcapacity’ have seen a limited improvement in profitability."

"The supply-demand imbalance may persist for longer if AI adoption runs ahead of labour market adjustment, placing sustained downward pressure on prices."

"In this environment, accommodative policies and a low-inflation, low-yield regime are likely to remain in place."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)