The Chinese yuan strengthened against its US counterpart in the Asian trading session in the middle of the week, driven by smaller-than-expected inflation data. For months, economists have been warning that the Chinese economy could slip into a period of deflation as companies slash prices to boost demand. While deflation fears remain high, the figures were slightly lower than market estimates.

According to the National Bureau of Statistics (NBS), the annual inflation rate fell 0.3% in July, down from the 0% print in June and higher than the consensus forecast of -0.4%. On a month-over-month basis, the inflation rate rose 0.2%, up from -0.2% in June and higher than the market projection of -0.1%.

Producer prices remained in deflation territory to kick off the third quarter. The producer price index (PPI) tumbled 4.4% last month, up from -5.4% in June. This was higher than economists’ expectations of -4.1%.

Overall, economists anticipate that the consumer price index (CPI) will rise by 0.5% this year and the PPI will decline by 3.5%.

“China’s weak demand follow-through in Q2 can be attributed to its relatively contained demand-side stimulus during Covid, years of regulatory tightening, and an ongoing housing correction,” Louise Loo, lead economist at Oxford Economics, said in a note Tuesday.

Meanwhile, the inflation statistics come after the NBS reported that exports fell at the sharpest pace since the coronavirus pandemic. In July, exports from China plunged 14.5%, down from -12.4% and worse than expected. Imports to China also plunged 12.4%, down from -6.8% and much worse than the estimate of -5%.

Overall, China’s trade surplus widened to $80.6 billion last month, although this is down from the same time a year ago.

The USD/CNY currency pair dropped 0.41% to 7.1871, from an opening of 7.2170, in overnight trading. The EUR/CNY pair slipped 0.32% to 7.8823, from an opening of 7.9080.