Guess what? China still has a domestic demand problem. And the deflation demon’s not banished.

That was the overarching takeaway from consumer and producer price data released on Wednesday.

Admittedly, these figures can feel monotonous. It’s the same general message month after dullsville month: The drag from China’s years-long property crackdown is contributing to a generalized malaise among Chinese consumers whose joie de vivre never really recovered from Xi Jinping’s draconian pandemic protocols.

Consumer prices rose just 0.3% YoY in May, Beijing said in Wednesday’s release. That was slower than expected, even as it at least marked a fourth month during which CPI price growth was positive on a 12-month basis.

Core consumer price growth ran 0.6% last month. Producer prices, meanwhile, spent a 20th month in deflation.

As ever, it’s important to understand how this fits into the geopolitical narrative. Anemic consumer price growth’s indicative of a lackluster consumption impulse, but China’s loath to dial back production.

That juxtaposition’s evident in the disparity between the pace of industrial output growth (6.7% as of the latest release) and retail sales, which grew a meager 2.3% in April from a year ago.

The 4.4ppt growth rate discrepancy in favor of industrial output’s the widest since November of 2022, just prior to the outbreak of street protests which ultimately prompted Xi to abandon “COVID zero.”

That points not just to overcapacity, but to engineered (i.e., deliberate) overcapacity. And China’s exporting the resultant surplus. I’ll recycle some familiar language. The rest of the world’s being asked to compensate for the country’s domestic demand shortfall by soaking up a tsunami of cheap goods. China’s trade partners grappling with above-target inflation at home are more than happy to import some of Xi’s factory gate deflation, but not all of it, and not if it means decimating local industries.

That dynamic’s especially contentious at a time when centrist political parties and coalitions across the developed world are struggling to fend off the far-right, which tends to draw support from the working-class and disaffected blue collar voters, many of whom were left behind by globalization.

Recall the figure above from “Devil’s Bargains.” In 2020, the Economic Policy Institute estimated that America’s trade deficit with Beijing cost the US 3.7 million jobs from the time China entered the WTO through 2018.

Data out last week showed China’s exports grew nearly 8% in May in dollar terms from the same month a year ago, while imports grew just 1.8%.

To be sure, China would rather not have this problem. Not to this extent. Beijing wants desperately to build a more balanced growth model. But so far, efforts to revive the Chinese consumer have largely come to naught, in part because the property crisis is proving a beast too big to tackle with a piecemeal approach.

In May, China got serious, rolling out a series of measures to stanch the bleeding, including a PBoC-backed relending scheme aimed at encouraging state-owned enterprises to buy up hundreds of billions of yuan in unsold homes. But it’s not enough.

“The course correction is certainly a welcome start, but it will require further follow-ups to secure a more sustained and balanced recovery,” SocGen’s Wei Yao and Michelle Lam said. “The Third Plenum, set to take place in July, will provide an important read on how strong the willingness for pro-demand pushes is,” they added.

In the meantime, the West is readying and rolling out more tariffs to shield domestic producers — sandbags and seawalls to mitigate waves of steel, construction equipment, appliances and whatever else Xi has to send abroad because he can’t sell it at home.

Commenting further on the prospects for demand-side stimulus, Lam said markets should be “realistic” first and “hopeful” second.