China’s 10-year government bond yield climbed to 1.74%, extending gains from the previous session, as mounting inflationary pressures signaled that the People’s Bank of China may have less scope to loosen monetary policy. Producer prices accelerated to 3.9% in May from 2.8% in April, the highest level since July 2022, prolonging the rebound from China’s earlier bout of producer-price deflation. The increase has been driven largely by higher commodity and energy costs linked to the conflict in the Middle East.
At the same time, consumer inflation remained relatively elevated at 1.2% in May 2026, just below the market consensus of 1.3%. While China has cushioned part of the energy shock through the use of its strategic oil reserves and the expansion of renewable energy capacity, persistent input-cost pressures risk squeezing corporate profit margins if firms choose to absorb the higher costs. If instead companies pass these costs on to consumers, inflation could accelerate further and erode household purchasing power.
