Daily Management Review

China Experiences Deflation As Attempts To Spark A Recovery Stumble


China Experiences Deflation As Attempts To Spark A Recovery Stumble
As China, the second-largest economy in the world battled to restore demand and pressure built on Beijing to provide more direct policy stimuli, China's consumer sector entered a state of deflation and factory-gate prices continued to decrease in July.
There is growing concern that China is about to enter a phase of significantly slower economic growth akin to Japan's "lost decades," during which time consumer prices and wages stagnated for a generation, in sharp contrast to the other regions' rapid inflation.
After a quick start in the first quarter, China's post-pandemic recovery has faltered as domestic and international demand deteriorated and a flurry of interventions to help the economy failed to boost activity.
The National Bureau of Statistics (NBS) said on Wednesday that the consumer price index (CPI) fell 0.3% year-over-year in July, vs the consensus prediction of a 0.4% decline in a Reuters poll. The decrease was the first since February 2021.
The producer pricing index (PPI) dropped for the tenth consecutive month, falling 4.4% instead of the anticipated 4.1%.
Since Japan's last negative headline CPI reading in August 2021, China is the first G20 economy to post a year-over-year decrease in consumer prices. The weakening adds to fears about the damage to business among major trading partners.
"For China, the divergence between manufacturing and services is increasingly apparent, meaning the economy will grow at two speeds in the rest of 2023, especially as the problem in real estate re-emerges," said Gary Ng, Asia Pacific senior economist at Natixis. "It also shows China's slower-than-expected economic rebound is not strong enough to offset the weaker global demand and lift commodity prices."
The data was released a day after trade figures revealed that imports and exports both declined in July and that China's massive real estate market was experiencing new financial problems. Despite reduced interest rates, anxious businesses and people are holding cash rather than using it to invest or spend.
On Wednesday, Asian stocks were on the back foot as the pricing data from China indicated that the country's economic recovery was stalling.
The devastating inflation that has affected the majority of other major countries and compelled central banks there to swiftly boost interest rates stands in stark contrast to China's anaemic prices.
There are indications that global inflation may have peaked and is even in some areas turning around. Brazil lowered interest rates last week for the first time in three years as inflation conditions improved.
Beijing has set a target for consumer inflation of approximately 3% this year, up from the 2% projected in 2022, and for the time being, the government is playing down worries about deflation.
The deputy governor of the central bank, Liu Guoqiang, stated last month that there would be no deflationary threats in China in the second half of the year but added that the economy would need time to recover from the pandemic.
Pork price decreases accelerated to 26% from 7.2% in July, primarily as a result of China's lacklustre consumption during a period of abundant supplies. Due to an increase in vacation travel, the CPI defied forecasts and increased by 0.2% month over month.
Core inflation, which excludes the cost of food and fuel, increased from 0.4% in June to 0.8% during the same period.
Therefore, some analysts believe that drawing analogies to Japan may be premature.
China's deflation, according to Xia Chun, chief economist at Yintech Investment Holdings in Hong Kong, will linger for six to twelve months but won't repeat Japan's history, where price stagnation has lasted for the majority of the past two decades.
While several localities loosened property limitations and policymakers launched initiatives to increase sales of vehicles and appliances in recent weeks, some market participants argue that more forceful stimulus is required.
"Uncertainties remain in China's plan to revive consumer spending," said Fitch Ratings, noting the plan will largely hinge on a rebound in consumer confidence and local governments' policy implementation, while details on the measures remain vague.
Following the significant Politburo meeting last month, investors have been impatiently waiting for authorities to introduce stimulus; nevertheless, the stock market has largely been unimpressed by the absence of tangible action.
"Markets and businesses should get used to the 'new normal' in which the Chinese government will avoid rolling out big stimulus," said Tommy Wu, senior economist at Commerzbank.
"Instead, targeted stimulus will be implemented and most policy measures will focus on the supply side," said Wu.