For commodities to benefit from reflation, rising inflation alone is not sufficient. It must be accompanied by a genuine economic and industrial rebound, indicated by rising Purchasing Managers' Indexes (PMIs). This combination dramatically improves commodity returns, especially for energy and industrial metals.

China reports 5% real GDP growth while experiencing persistent deflation. This is historically unprecedented for an investment-led economy, with the only possible parallel being the 19th-century U.S. The inconsistency suggests official growth numbers are not credible.

Contrary to conventional wisdom, a stronger renminbi would exacerbate China's deflationary pressures. This would harm corporate revenues, leading to wage cuts and negatively impacting consumer spending. Therefore, currency appreciation would make the desired economic rebalancing towards consumption more difficult.

Asia is uniquely vulnerable to the current energy crisis not just from price increases but from physical supply shortages—a factor rarely modeled in past shocks. This dual risk poses a more significant threat to economic growth than in other regions, with some economies already facing rationing.

China's policy to combat deflation focuses on cutting excess industrial capacity. However, this is deemed insufficient because the root cause is weak aggregate demand. A sustainable solution requires boosting consumption through social welfare, an approach policymakers seem hesitant to implement on a large scale.

The blockade in the Strait of Hormuz is creating cost-push inflation in China, as rising energy and petrochemical prices eat into manufacturing profit margins. This economic pressure undermines Beijing's efforts to stimulate domestic consumption, creating a difficult stagflationary environment.

While initial energy price spikes boost short-term inflation expectations, a sustained shock eventually hurts economic growth. This growth concern acts as a natural ceiling on long-term inflation expectations (break-evens), as markets anticipate an economic slowdown, preventing them from rising indefinitely.

In response to deflation and eroding profits from hyper-competition, the Chinese government's "anti-evolution" policy is a deliberate strategy to force consolidation, reduce overcapacity, and restore pricing power, thereby boosting corporate return on equity.

Unlike Western economies facing severe inflationary threats from the Iran oil crisis, China is in a better position. A slight rise in inflation could actually be beneficial for its economy, helping to counteract recent deflationary pressures without alarming its central bank, the PBOC.