China

Chinese Economy Faces Deflation

NBS 1

China’s consumer inflation rate remained stagnant in June, while factory-gate prices continued to decline, raising concerns about deflation risks and sparking speculation about potential economic stimulus measures. The consumer price index remained unchanged from the previous year, which represents the weakest rate since February 2021 and is largely due to lower pork prices. Core inflation, which excludes volatile food and energy costs, slowed to 0.4% from 0.6%. Meanwhile, producer prices fell 5.4% year-on-year, the sharpest decline since December 2015.

Economists warn of the looming threat of deflation, which could undermine the ongoing economic recovery and erode consumer confidence. The data adds to the evidence of a weakening recovery, prompting discussions about the need for further stimulus measures to support the economy. However, policymakers are expected to adopt a cautious approach to policy easing, given concerns about debt risks.

A 7.2% decrease in the price of pork, a staple of the Chinese diet, was the main factor in the decline in consumer prices. The government has taken steps to stabilize pork prices by increasing purchases for state reserves to boost demand. On the other hand, continuing declines in the price of international commodities like coal and oil fueled producer price deflation.

While China hasn’t experienced prolonged consumer price deflation since the global financial crisis in 2009, authorities face challenges in implementing effective measures this time around due to limited policy options and debt concerns. The government has so far implemented modest measures to support the economy, such as small interest rate cuts and extended tax breaks for electric car buyers.

Experts suggest that the focus should shift from supply-side policies to addressing demand issues. Targeted lending tools have been used to support companies, but direct assistance to consumers, such as subsidies, has been less prevalent. Analysts warn of the possibility of an intensifying “deflation-recession loop” if excess supply persists without sufficient demand stimulation measures.