(Yicai) April 14 -- China's price dynamics are currently transitioning from a period of low-level inertia to moderate recovery. Recent disturbances in the Strait of Hormuz have driven up international oil prices, introducing external shocks to the pricing system. However, compared to major economies, China's price transmission pathways remain smoother and more controllable.

Based on the narrowing decline in the producer price index and the marginal improvement in the gross domestic product deflator, the inertia of China's low price levels has entered its final stage, with endogenous recovery momentum accumulating.

The year-on-year decline in PPI has continued to narrow since reaching a bottom in June 2023, with a significant reduction in the decline by early 2026. The consumer price index has been fluctuating within a narrow range, with its central tendency gradually rising. Although the GDP deflator remains negative, there is a trend of convergence in its decline.

However, relying solely on the inertia of decline results in a slow pace of price recovery, which may not align with policy objectives. Therefore, external shocks play a crucial catalytic role at this stage.

The Structure of Energy Consumption Significantly Weakens the Transmission of Oil Prices

China's energy consumption structure and the pricing mechanism for refined oil jointly determine this effect. For a given increase in international oil prices, the marginal impact on China's CPI is noticeably lower than that in the United States. Moreover, as oil prices rise, this disparity becomes even more pronounced.

According to the total energy supply statistics from the International Energy Agency, oil accounts for around 18 percent of China's primary energy structure, which is significantly lower than that of the United States (36 percent), Japan (37 percent), South Korea (37 percent), and Germany (34 percent).

China's energy consumption is primarily driven by coal and clean energy. The former enjoys an abundant domestic supply, with prices largely determined by the domestic market, while the latter is largely unaffected by international fossil energy prices. This means that fluctuations in international oil prices are naturally diluted in their transmission to China's overall energy costs.

If the price of Brent crude oil rises from USD70 per barrel to USD110 per barrel, it would lead to an increase of around 0.45 percentage point in China’s CPI, which is about 52 percent of the similar impact in the US (0.85 percentage point). Furthermore, considering that oil accounts for only 18 percent of China's primary energy consumption structure, this indicates that the indirect transmission strength is relatively lower, resulting in a total effect that is likely weaker than that in economies that are more dependent on oil.

The Coordination of Fiscal and Monetary Policies Provides Support From the Demand Side

This year, China has further intensified its fiscal expansion. Coupled with stronger counter-cyclical and cross-cyclical adjustments in monetary policy, this creates critical policy conditions to promote a transition from passive catalysis to active guidance in driving a trend-based recovery in price movements.

In terms of fiscal policy, China's fiscal deficit has reached a historical high of CNY5.89 trillion (USD864 billion) this year. This includes the issuance of CNY1.3 trillion in new ultra-long-term special treasury bonds and CNY4.4 trillion in new local government special bonds, along with the provision of CNY800 billion (USD117.3 billion) in new types of policy-based financial instruments. The coordinated effect of these various tools has resulted in total general fiscal expenditure exceeding CNY11.5 trillion (USD1.68 trillion), providing solid support for demand recovery and price improvement.

In terms of monetary policy, the report emphasizes the "flexible and efficient use of various policy tools such as reserve requirement ratio cuts and interest rate reductions," while maintaining policy consistency and retaining ample operational space. Compared to some economies facing strong price pressures, China benefits from its refined oil pricing mechanism, which effectively buffers external shocks and keeps overall residential prices manageable. This situation provides favorable conditions for maintaining a relatively accommodative monetary policy stance.

Rapid Price Increases May Impose New Constraints

Currently, Brent crude oil prices are around USD100 per barrel, providing some room before reaching the regulatory threshold of USD130. However, if geopolitical conflicts escalate further and drive oil prices higher, domestic refined oil prices may face constraints on upward adjustments. In this scenario, refining margins will be compressed, leading to increased pressure on fiscal subsidies and creating certain constraints on the allocation of fiscal resources.

The rebound in the PPI does not necessarily lead to an immediate improvement in the CPI, as transmission effects exhibit time lags and structural differentiation. Currently, within the price structure, food prices remain relatively stable due to abundant supply, while rising energy and related costs provide support for non-food items. As a result, improvements in aggregate indicators may be accompanied by divergences among various components.

Rising oil prices have a constraining effect on global economic growth and may indirectly impact China's economy through external demand channels. Europe, as a key export market, could face pressure on industrial activity due to higher energy costs, potentially causing a temporary impact on China's exports.

Based on the above analysis, the following types of signals can be closely monitored to assess the progress of the price pattern transition. Firstly, whether the PPI shows consecutive months of positive growth, which would confirm the formation of a price turning point. Secondly, improvements in the year-on-year cumulative profits of industrial enterprises should be observed to verify the supporting role of price rebounds on profitability from a microeconomic perspective. Thirdly, whether international oil prices approach or reach the critical threshold of USD130 per barrel serves as an important stress test for the price transmission mechanism.

Lastly, changes in industrial sentiment indicators (such as the purchasing managers' index) in major economies like Europe should be evaluated to assess marginal changes in the external demand environment.

(Cheng Shi is the chief economist at ICBC International Holdings, and Xu Jie is a senior economist at ICBC International.)