China’s Inflation Problem? It Has None

SINGAPORE—As Western central banks continue to jack up interest rates in an effort to douse stubbornly high inflation, China faces a growing risk of the opposite problem—deflation.

Prices charged by Chinese factories tumbled in May at their steepest annual pace in seven years, while consumer prices barely budged, fresh signs of the challenges faced by the world’s second-largest economy both at home and abroad.

Economists say the absence of inflationary pressure means China could experience a spell of deflation—a widespread fall in prices—if the economy doesn’t pick up soon.

Persistent deflation tends to throttle growth and can be difficult to escape. While a prolonged period of falling prices probably isn’t in the cards, Chinese policy makers will nonetheless need to do more to stave off that risk and get the economy motoring again, economists say, perhaps by trimming interest rates, weakening the currency or offering cash or other spending inducements to households and businesses.

Ting Lu, chief China economist at Nomura in Hong Kong, said in a note to clients Friday that he expects local banks to cut key lending rates as soon as next week.

In remarks made at a meeting Wednesday and published by China’s central bank after the release of monthly inflation data Friday, central-bank Gov. Yi Gang said he expects consumer-price inflation to edge up in the second half of the year and exceed 1% in December. He said the People’s Bank of China would use its tools to support the economy and promote employment.

Falling prices in China aren’t necessarily bad news for the global economy, as lower costs to import Chinese goods should help bring down inflation rates that for many economies are still uncomfortably high.

“In a sense, China is already exporting deflation to the world,” said Carlos Casanova, senior Asia economist at Union Bancaire Privée in Hong Kong. That could help ease the pressure on the U.S. Federal Reserve and other central banks that are battling to bring down inflation, he said.

China’s producer prices—what companies charge at the factory gate—fell 4.6% from a year earlier in May, the weakest reading since early 2016 and the eighth straight month of declines.

Consumer prices rose just 0.2%, China’s National Bureau of Statistics said Friday, slightly higher than the 0.1% annual gain recorded in April but still well below the 3% ceiling for annual inflation set by the government and central bank.

In the U.S., consumer-price inflation in April slowed to a 4.9% annual rate, but that was still more than double the Federal Reserve’s 2% goal. In the 20 nations that use the euro, annual inflation was 6.1% in May.

After soaring last year in the wake of Russia’s invasion of Ukraine, prices of crude oil, food and some other commodities have pulled back, partly leading to China’s subdued inflation.

But also behind China’s predicament, which stands in contrast to the experience of most other economies as they emerged from the Covid-19 pandemic, is a shortfall in spending both domestically and from overseas.

Chinese factories are cutting prices because foreigners aren’t buying their goods with the same gusto as before central banks started ratcheting up borrowing costs. A hoped for consumer spending binge that was supposed to propel growth in China hasn’t materialised. Real estate is in the doldrums, crushing investment.

Western policy makers and economists are exploring whether fat corporate profit margins are stoking inflation in their economies. In China, industrial profits are sinking.

The inflation data adds to a string of disappointing signals on the strength of China’s recovery, which had been expected to power global growth this year after Beijing ditched its draconian Covid controls at the close of 2022.

Chinese exports fell in May from a year earlier, the first annual decline in overseas shipments in three months. Business surveys showed factory activity shrank in May and services-sector activity softened. More than a fifth of young people are unemployed.

Still, most economists think China will meet or exceed the government’s goal of growing the economy by 5% or more this year, given the weak base of comparison with 2022, when sporadic lockdowns in major cities hammered the economy.

Zichun Huang, China economist at Capital Economics, said she doesn’t think China will experience broad deflation and expects consumer price growth to pick up in the coming months thanks to support from policy makers and an improving labor market.

—Grace Zhu in Beijing contributed to this article.

Chip makers are fighting to assure investors that the artificial-intelligence boom is racing forward. Wall Street might not believe it until Nvidia’s NVDA -0.98%decrease; down pointing triangle Jensen Huang says so.

When Huang steps up to the mic for his company’s earnings call Wednesday, he will have the world’s attention. What he says about Nvidia’s present will preview the future of AI, dictate the path forward for a tech-crazed stock market and influence an American economy increasingly tethered to hopes that the boom won’t go bust.

The $5 trillion chip maker has provided the key building blocks for AI since the launch of ChatGPT in 2022 set off a race for dominance among OpenAI, Anthropic and established Silicon Valley giants. Now, as Nvidia backstops sprawling data-center projects and an exotic money pipeline to boost chip demand, the company’s influence is arguably bigger than ever.

But there are signs of trouble ahead. Political pushback to AI is growing. A bond selloff propelled borrowing costs to their highest levels in years. The hyperscalers that include some of Nvidia’s key customers—once cash-printing machines—are relying more on debt. OpenAI recently told investors its revenue rose by a tepid 18% in the second quarter while its losses deepened.

Nvidia is increasingly stepping in to shore up potential weak points across the market. Earlier this month, the company teamed up with six of Wall Street’s biggest firms on a $500 billion AI-financing plan, pledging to backstop lending to customers that can’t afford its chips otherwise. The chip maker last week also took a stake in Cloverleaf Infrastructure, which arranges power for data centers, and struck a $6 billion deal with startup Poolside aimed at developing a powerful open-weight AI model.

After watching shares in other chip makers and the so-called Magnificent Seven tech companies swing wildly in recent months, Wall Street is hoping Nvidia can beat expectations—again. The countdown is on.

“It’s kind of becoming more and more like the World Cup final than the Super Bowl at this point,” said Brian Mulberry, chief market strategist at Zacks Investment Management. “It’s just gotten to be that big.”

The company has smashed analysts’ earnings estimates for each of the 14 quarters since the AI boom kicked into high gear. Nvidia posted 210% annual growth in net income in its last three-month period, according to FactSet, making Wall Street’s 126% projection look pedestrian.

Expectations for a blowout second quarter have risen rapidly over the course of this year. All Nvidia will have to do to beat this target: outrun 95% annual earnings growth to more than $51.5 billion. Analysts project the chip maker will report record sales of $92 billion for the period, up from a forecast of $78 billion at the start of this year.

In July, big-tech earnings sparked volatility. Concerns about runaway capital spending spread across the sector after Alphabet’s and Tesla’s results, driving a $890 billion wipeout that contributed to the unwind of hedge fund Situational Awareness. Microsoft posted the largest one-day gain in market capitalization by any company, ever, after a quarter proving that it could still show investors the money. SpaceX rocketed higher after a record-breaking initial public offering, only to see $1 trillion in value evaporate.

Surging memory prices and borrowing costs have fueled fears that those and other companies will be unable to keep plowing more money into supplies including Nvidia chips. Shaia Hosseinzadeh, founder of OnyxPoint Global Management, has recently bought dips in AI-infrastructure stocks when Wall Street has strained to absorb massive debt issued by Silicon Valley.

“The macro data is really quite robust,” he said. “Of course, there’s a level at which everything breaks.”

Investors have kept pumping money into the AI trade despite concerns around chip consumers—and to the benefit of chip producers. That is why Nvidia’s outlook for semiconductor demand could send ripples through counterparts such as Micron Technology and Sandisk, developers of the data centers in which their chips reside, and a supply chain of power producers, contractors and other specialists that underpin the globe-spanning AI build-out.

“We joke internally that we’re all Nvidia analysts now,” said David Lefkowitz, head of U.S. equities at UBS Global Wealth Management.

The irony is that investors have tended to sell Nvidia stock immediately after blockbuster earnings, with shares falling each trading session after its four past quarterly reports. Some are betting that will be the case this time around, too.

The options market is pricing in a 5.3% swing, higher or lower, in Nvidia shares during the session following earnings, according to Option Research & Technology Services. That is higher than the 4.8% average move in Nvidia’s stock over the last 12 months after the company reports quarterly results.

In recent days, some of the most actively traded Nvidia options have been put contracts tied to the stock falling from its Friday value of $214.75 to $205 and $210 apiece, according to Cboe Global Markets data. Put options give the right to sell a stock by a set price and typically represent a bearish wager.

Many analysts remain optimistic. Frank Lee, global head of tech hardware and semiconductor research at HSBC Global Investment Research, recently raised his price target for Nvidia shares to $360 from $325, citing, among other things, Nvidia’s strategic partnerships with suppliers and its role as a top contributor to open-source AI.

China’s Inflation Problem? It Has None

Falling prices at the factory gate and subdued increases in the costs of consumer goods contrast with searing inflation in many countries

Nvidia’s earnings will test Wall Street’s confidence in the AI boom.