China enters deflation despite efforts to boost recovery

China’s consumer sector deflated and ex-factory prices continued to decline in July as the world’s second largest economy struggled to revive demand and pressure mounted for more direct stimulus measures from Beijing.

Concerns are growing that China is entering an era of much slower economic growth, similar to the period Japan went through, in which consumer prices and wages stagnated for a generation, in stark contrast to the rapid inflation observed elsewhere.

The post-pandemic recovery of China it has slowed down after a strong start in the first quarter, due to the weakening of domestic and foreign demand and the failure of a series of support measures for the economy to prop up activity.

The consumer price index (CPI) fell 0.3% year-on-year in July, the National Statistics Office reported on Wednesday, compared with the median estimate of a 0.4% decline in a Reuters poll. It was the first drop since February 2021.

The Producer Price Index (PPI) fell for the tenth consecutive month, down 4.4%, and faster than the forecast fall of 4.1%.

China is the first G20 economy to report a year-on-year decline in consumer prices since Japan’s last negative headline CPI reading in August 2021. The weakness adds to concerns about the impact to business among major partners. commercial.

“For China, the divergence between manufacturing and services is becoming more apparent, meaning the economy will grow at two speeds for the rest of 2023, especially as trouble in the real estate sector resurfaces.said Gary Ng, senior Asia Pacific economist at Natixis.

“It also shows that China’s slower-than-expected economic rebound is not strong enough to offset weaker global demand and lift commodity prices.”.

The data comes a day after trade figures showed that both exports and imports fell in July.

Asian stocks remained on the defensive on Wednesday as Chinese price data confirmed that its economic recovery is running out of steam.

disparate perspectives

China’s anemic prices are in stark contrast to the crippling inflation most major economies have experienced, forcing central banks to rapidly raise interest rates.

However, there are signs that global inflation may be peaking and, in some cases, reversing. Last week, Brazil cut interest rates for the first time in three years, against a more benign inflationary backdrop.

Beijing has set a consumer inflation target of around 3% this year, which would be up from 2% in 2022, and for now, authorities are downplaying deflation concerns.

Liu Guoqiang, deputy governor of the central bank, said last month that there would be no deflationary risks in China in the second half of the year, but noted that the economy needs time to return to normal after the pandemic.

The fall in Chinese CPI in July was mainly due to an acceleration in the decline in pork prices to 26% from 7.2%, due to heavy rains that affected supplies. On a month-on-month basis, the CPI actually rose 0.2%, defying expectations for a decline, buoyed by rising holiday travel.

According to some analysts, this suggests that comparisons with Japan may be premature.

Xia Chun, chief economist at Yintech Investment Holdings in Hong Kong, expects China’s deflation to last between six and 12 months, but it will not repeat the scenario in Japan, where stagnant prices have persisted for much of the past two decades.

In recent weeks, authorities have announced measures to boost car and appliance sales, while some cities have eased restrictions on ownership, but some market participants say more decisive stimulus is needed.

Investors have been eagerly waiting for the leadership to inject stimulus after last month’s powerful Politburo meeting and the stock market has been mostly disappointed by the lack of concrete action.

“Markets and companies should get used to the ‘new normal’ in which the Chinese government will avoid deploying large stimulisaid Tommy Wu, a senior economist at Commerzbank.

“Instead, targeted stimulus will be applied and most support will be focused on the supply side.Wu said.

Source: Reuters