China's CPI fell by 0.3% in the year to July, down for the first time in more than two years while PPI remained deep in deflationary territory, raising hopes that the authorities will respond with stronger stimulus. 

Yesterday's trade data for the start of the third quarter showed further export weakness, which was broad-based, both regionally and in terms of major export categories. We expect the US and European demand environment to get even more challenging in coming quarters, with Asia showing little independent demand impetus. 

The news on the import front was less negative than the commentary suggested. Imports fell in the year to July, but the decline likely reflected lower prices of commodities, not volumes. As you can see on the chart below, nominal and real imports have diverged significantly since early this year. 

We don’t have the import price data for July yet, but anecdotal evidence suggests the dichotomy was likely preserved.

While the real import data for July is likely to show a stronger domestic demand story than the nominal figures imply, the damage from the current flooding in northern China is yet another major blow to Beijing's efforts to revive the economy. 

Beyond the immediate disruption to economic activity and further stretching of local government finances in the area of the floods, we detect deepening disappointment and a loss of confidence in this administration's ability to protect and grow people's livelihoods. 

This will further sap already downbeat "animal spirits", making Beijing's job of reviving the economy harder.

These developments together with Xi's recent political drawbacks, evidenced in the mysterious disappearance of Foreign Minister Qin Gang and his replacement by Wang Yi as well as the wholesale purge of the Rocket Forces, suggest that the supreme leader is likely to put more and bigger effort in stabilising the economy. 

Beijing remains anxious about bailing out the big real estate developers despite fears that a debt crisis rivaling China Evergrande Group’s default may be brewing in Country Garden Holdings Co -- formerly the nation’s largest private-sector developer by sales.

If the authorities roll out much larger stimulus measures, this is likely to buoy investor sentiment in the short-term. Still, China's ingrained debt-deflationary problems will take years to unwind and we remain pessimistic about its long-term growth prospects.