Yuan strengthens as Chinese inflation goes negative

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China’s annual rate of inflation turned negative for the first time in a decade in November, but analysts were quick to play down any suggestion a destructive deflationary cycle. The CPI fell to 0.5% in year-on-year terms thanks largely to a massive spike in pork prices a year ago that has now unwound.

There have been more consistent signs of deflationary pressure in Chinese producer prices since the pandemic erupted. These fell in year-on-year terms for an eighth straight month in November, but at -1.5%, the decline was the gentlest since May. Other Chinese data released overnight showed loan growth moderating slightly, although it was still at nearly 13%.

The Chinese yuan strengthened on the back of the data, trading below 6.50 to the dollar in the offshore market for the first time in over 2 ½ years.