China is reflating...

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China has been stuck in deflation since late 2024. The consensus suggests it is persistent. However, inflation has accelerated since last summer. And we believe China may have shifted from a one-sided deflation regime to a two-sided inflation distribution, where upside risks are now non-trivial. Analysts and markets are yet to adjust.We view the government’s “anti-involution” campaign, which targets overcapacity and price competition, as a key driver. Fixed asset investment has declined sharply since last summer, while industrial production has remained stable, implying a reduction in excess capacity. Consistent with this, sectors with the largest declines in investment have also seen the largest price increases, pointing to a shift in pricing from clearing excess supply toward costs and margins. If durable, China’s reflation will have global repercussions, most directly via export prices, even if the precise impact is difficult to quantify. This contrasts with the common view outside China that US tariffs will lead to excess supply being dumped into other markets, putting downward pressure on global prices. What's more, proximity to China might not matter much for products where prices are set globally, such as metals and semiconductors. China’s inflation has accelerated in recent monthsChina’s GDP deflator has been negative since Q3-2024 in q/q terms. Chinese core inflation has also been among the lowest in Asia, even though inflation in the region is rather well-behaved. Arguably, there is a consensus that China’s economy is in the midst of stubborn deflation, something …