China’s deflation fears intensify as consumer prices fall at the steepest pace in three years

William of England
By William of England 5 Min Read

The consumer price index fell 0.5% final month from a yr earlier, the nationwide statistics bureau mentioned in a press release Saturday. That’s the greatest drop since November 2020 and is weaker than the 0.2% drop projected by economists in a Bloomberg survey.

Producer prices declined 3%, in contrast with a forecast of a 2.8% fall. Factory-gate prices have been mired in deflation territory for 14 consecutive months.

China has struggled with falling prices a lot of this yr, contrasting with many different elements of the world the place central banks are centered on taming inflation as an alternative. Bloomberg Economics expects deflationary dangers to persist into 2024, as there aren’t sufficient catalysts to counter the housing hunch, which has suppressed demand and prices.

Deflationary pressures have elevated due to weak home demand, mentioned Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd. “This highlights the importance of more supportive fiscal policy.”

Deflation is harmful for China as a result of it could result in a downward spiral of financial exercise. Consumers might maintain off purchases on expectations prices will preserve falling, additional weighing on total consumption. Businesses may decrease manufacturing and funding because of unsure future demand.

Deflation may also make financial insurance policies to stimulate the economic system much less efficient, as declining prices decrease company earnings and make it tougher for firms to service their debt. The central financial institution has sought to downplay the dangers of deflation this yr, with an adviser to the People’s Bank of China saying final month that these pressures are “temporary.”

Stronger Support

Beijing not too long ago turned to fiscal coverage to spur home demand, unexpectedly growing its funds deficit and inspiring banks to assist native governments refinance debt at decrease rates of interest to assist improve their spending capability.

There are indications that fiscal help will strengthen in the coming yr to assist the restoration: China’s high leaders on Friday introduced such insurance policies might be stepped up “appropriately” and emphasised the significance of financial “progress,” suggesting subsequent yr’s progress objective could also be formidable.

But it has been tough for extra authorities spending to offset declines in demand coming from different sectors. The worth of recent residence gross sales amongst China’s 100 greatest builders fell 29.6% on-year in November.

Exports additionally stay weak, rising simply 0.5% final month, far beneath the pace seen in current years. Economists have mentioned it’s too early to name a backside for progress, with some predicting additional strain on the economic system in 2024 due to ongoing challenges from the property sector.

The weak CPI figures have been partly because of slumping pork prices. An ample provide of hogs and sluggish consumption have weighed on the market, prompting the authorities to take steps to support prices. The meat has a big share in China’s CPI basket because of its reputation amongst native diners.

The so-called core CPI, which strips out unstable meals and vitality prices, rose 0.6% on yr in November, repeating the earlier month’s efficiency.

China has set an annual inflation goal of round 3% this yr, which it’s practically sure to overlook. Economists have combined views on the outlook for 2024, with some arguing that consumer prices might develop at a pace of round 1% as sentiment improves, and others arguing deflation will persist into the first half.

Proactive fiscal stimulus might be a significant a part of China’s coverage goals subsequent yr, in response to Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc. The measures will “have to strike a balance between juicing investment and consumption, and capping debt risks of local governments.”

— With help from Tom Hancock, Jasmine Ng, Jill Disis, and Yujing Liu

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