Surprise: Domestic demand in China’s still moribund.

Or at least that’s one way to read the latest inflation data out of the world’s second-largest economy, where policymakers are grappling with the opposite problem as their counterparts in the US.

Chinese consumer prices rose just 0.1% last month from the same period a year ago, data released on Thursday showed. That marked a miserable disappointment. Consensus wanted 0.4%. It’s fair to say the prior month’s uptick was a one-off attributable to holiday spending.

Core price growth likewise slipped, receding to 0.6%, just half of February’s annual rate.

It’s the same story month after month: Chinese households aren’t confident about the outlook. And who can blame them? Sentiment never recovered from the body blow dealt by Xi’s prolonged COVID lockdowns. Legacy drag from the property curbs doesn’t help. The Party’s piecemeal approach to stimulus hasn’t been especially effective. And the government’s averse to big-ticket fiscal measures.

Fitch this week joined Moody’s in cutting China’s outlook to negative. The ratings agency said the country’s debt burden will likely rise as the government works to stimulate demand. Beijing was quick to suggest that any fiscal measures adopted to combat the slowdown are credit-positive, even if they’re debt-financed.

I gotta tell you: I agree with Beijing on this one. China needs fiscal stimulus to bolster consumption. If households can’t be cajoled, the government needs to step in as the spender of last resort (if you will). To be sure, local debt’s a problem in China. An existential one on some narratives. General (federal) government debt’s not.

The yuan’s a quasi-reserve currency, which is to say China’s monetary sovereignty is more than sufficient. The banking system’s entirely beholden to the Party, the CNY market doesn’t rely on overseas sponsorship and notwithstanding my steadfast contention that it’d be crazy (and self-evidently so given the conspicuous absence of clearly-marked exit doors) for reserve managers to get into CNY in anything like size, foreign demand for Chinese sovereign bonds is if anything unsated.

So, Fitch is wrong. Probably. With a big asterisk to account for the very real possibility that over-leveraged LGFVs will eventually have to be backstopped at the federal level. If you want to argue that local government debt might as well be considered obligations of the federal government, I’ll concede the point, but again: China’s a reserve currency issuer with the second-largest economy on Earth. That affords Xi considerable leeway. He’d have even more leeway if he’d back off the Mao impression, but that’s a separate debate.

In any event, Chinese producer prices spent an 18th month in deflation, Thursday’s data showed. That’s the longest such stretch in eight years. Part of that’s the property crisis. Prices for building materials are falling sharply and that’s a self-fulfilling prophecy: It fosters competition for scarce demand, and competition means price wars and a race to the bottom.

The juxtaposition between deflation in China and stubbornly brisk price growth in the US points to a prolongation of the policy divergence between the Fed and the PBoC. That’s conducive to yuan weakness. The benchmark yield spread favors the dollar by the most in decades.

All of this underscores the concerns Janet Yellen expressed on a four-day visit to China last week. If domestic demand remains subdued, all that “stuff” coming out of China’s factories has to go overseas, and while that dynamic can help damp inflation across the developed world, not all of Xi’s extras are welcome.

In short: Xi’s domestic demand problem is also an overcapacity problem, and while the rest of the world’s willing to help out with that, there’s a limit, and that limit varies by industry. EVs are becoming a point of contention in that regard, to put it politely.