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.
Standard Chartered analysts Carol Liao and Moriarty Lam assert that China's reflation is primarily driven by cost factors, with industrial profits primarily rebounding in AI and oil-related industries. Liao and Lam note that domestic demand continues to lag behind supply, resulting in a persistent supply-demand imbalance. They anticipate that accommodative policies and a low-inflation, low-yield environment will continue as rebalancing efforts take time.
While productivity gains are supporting China's capacity, domestic demand has lagged, creating a long-lasting supply-demand imbalance. Nevertheless, their analysis indicates that recent reflation has been mainly fueled by higher global commodity prices. Industrial profits have recovered mainly in AI and oil sectors, while industries typically associated with overcapacity have seen limited profit improvements.
The supply-demand imbalance may endure longer if AI adoption outpaces labor market adjustments, applying sustained downward pressure on prices. Consequently, they expect accommodative policies and a low-inflation, low-yield regime to persist.
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