**Abstract**
Domestic demand rebounded, driving a recovery in the Producer Price Index (PPI). September economic data indicated that domestic consumption and industrial activity are gradually improving. In September, the country’s factory-gate prices for industrial producers fell 1.3% year-on-year, a smaller decline than the previous month by 0.3 percentage points. This marked the fourth consecutive month of narrowing declines. Meanwhile, the PPI saw a monthly increase of 0.2%, marking the largest rise this year.
According to the report from the Bank of Communications Financial Research Center, two main factors contributed to the PPI’s year-on-year decline and its largest monthly gain this year. First, the stabilization and rebound of domestic economic growth have improved industrial production and operations. From a month-on-month perspective, both the ex-factory prices of production materials and living goods showed an upward trend. Production material output rose 0.3% from the previous month, while living goods prices increased by 0.1%. The rise in production material prices was the key driver behind the PPI's significant monthly increase.
Looking at the PPI of production materials, the mining sector saw a 0.6% increase, raw material industries rose 0.6%, and processing industries increased 0.1%. These trends align with the industrial producer purchase price index, which also showed increases in fuel and ferrous material prices. This reflects the ongoing effects of policies aimed at stable growth, structural adjustment, and reform, which are gradually boosting industrial performance.
While the mining and processing sectors saw improved profits on a month-on-month basis, the consumer-related living materials sector also showed signs of recovery. Food prices rose 0.3%, clothing prices increased 0.2%, and general daily goods and durable consumer products remained flat. These movements were partly driven by higher prices in non-food categories such as education, cultural goods, and housing during the double holiday period.
Second, the recent rise in international commodity prices also contributed to the improvement in the domestic PPI. Geopolitical tensions in Syria have led to a surge in global oil prices, with Brent and WTI crude oil futures stabilizing above $100 per barrel. This, in turn, has pushed up the CRB index, which typically leads the domestic PPI by about one month. As a result, China’s PPI growth rate improved significantly in September.
Wang Xiaoguang, a researcher at the National School of Administration, expects the third-quarter GDP to be between 7.6% and 7.8%, potentially the highest point of the year. The fourth quarter is likely to see a slight slowdown, around 7.5%–7.6%.
With the M2 money supply rising 14.2% year-on-year in September—down 0.5 percentage points from the previous month—and M1 increasing 8.9% year-on-year, the slight slowdown in M2 growth was mainly due to last year’s high base. However, the increase in economic sentiment and currency multipliers helped offset this. The drop in M1 growth was attributed to companies reallocating deposits into fixed or wealth management products before the "Double Eleven" shopping festival.
In September, RMB loans increased by approximately 789.7 billion yuan, showing a 78.4 billion yuan increase from the previous month and a 167.1 billion yuan increase compared to the same period last year. The annual growth rate of RMB loans reached 14.3%, slightly higher than the end of August and lower than the same period last year. For the third quarter, total new loans amounted to around 2.2 trillion yuan, representing 24.2% of the annual target. Three factors contributed to the strong loan growth: improved deposit conditions in August, clearer economic stability, and banks accelerating loan disbursement to meet annual targets.
From a social financing perspective, internal bank financing grew significantly. The proportion of local foreign currency loans in total social financing rose to 62.58%. While net acceptance of bank bills decreased sharply, it indicated stronger medium- and long-term financing demand from enterprises, likely due to inventory replenishment or production expansion. Capital market financing remained steady, though stock market activity was suppressed by policy. Corporate bond net financing rose 83.1 billion yuan year-on-year, and non-financial enterprise equity financing increased by 4.5 billion yuan.
Industry insiders predict that monetary policy will remain stable and neutral, with interest rates and reserve requirements likely unchanged. Reverse repos will continue to be used frequently to manage liquidity and guide market interest rates.
Moderate inflation is favorable for reforms. Hu Chi, a researcher at the State-Owned Assets Supervision and Administration Commission, expects greater price pressures in the second half of the year, but overall inflation remains moderate, with the annual CPI expected to reach around 3%. This is well within the government’s 3.5% target.
Li Huiyong, chief macro analyst at Shenwan, forecasts a 3.1% year-on-year increase in CPI for the fourth quarter, with full-year CPI rising to 2.6%–2.7%. Although September’s CPI rise raised concerns about tighter monetary policy, weak demand and overcapacity keep non-food prices low. The PPI is expected to continue narrowing its decline and eventually turn positive.
Great Wall Securities believes the domestic economic recovery is limited, driven mainly by exports and infrastructure investment. While export rebounds are supported by a weaker dollar and overseas recovery, infrastructure investment depends on policy and financial support. Other factors remain uncertain.
Inflationary pressures could provide space for reforms like resource tax adjustments. However, the government must balance these reforms with slowing economic growth. Great Wall Securities notes that uncertainties in the fourth quarter include exchange rates, local government debt, real estate investment, and declining financing growth. Liquidity conditions will be more complex, and the government will need to make trade-offs in policy decisions.
While economic growth may slow in the fourth quarter, the decline is expected to be limited, and the government will still prioritize maintaining a certain growth rate to support reforms.
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