China's economy is under strain. Persistent deflationary pressure could soon prompt the People's Bank of China to ease monetary policy further. ING economists believe this scenario could materialize by late 2025.

Despite the recent policy stimulus package, May data remains disappointing. According to analysts, consumer prices have stayed in negative territory for the fourth consecutive month. As a result, China's consumer price index declined by 0.1% year-over-year, while the producer price index plunged by 3.3%, marking the sharpest drop in 22 months.

The main source of inflationary drag came from rising food costs, particularly those of fresh vegetables and eggs. These increases offset only modest gains in pork prices and non-food categories.

According to ING analysts, closely monitoring macroeconomic data over the coming months will be essential to assess whether monetary easing can return the consumer price index to positive territory. However, the bank acknowledged that forecasting remains challenging, noting that domestic consumer sentiment is still weak and that tariffs could add to deflationary pressure.

Against this backdrop, ING sees room for another interest rate cut of 10 to 20 basis points. Analysts believe that the PBOC may take this step in the fourth quarter of 2025 if deflation persists. Deflation risks have intensified due to weak domestic demand and global trade headwinds, including a 34.5% year-over-year decline in exports to the United States. Meanwhile, steady shipments to ASEAN countries and the EU have contributed to an overall 4.8% increase in trade.