Recently, China’s consumer prices and producer costs have seen steep declines, revealing the challenges of the country’s economic recovery. The consumer price index fell 0.5% last month from a year earlier, marking the largest drop since November 2020. This figure is weaker than the 0.2% drop projected by economists. Producer prices declined 3%, compared with a forecast of a 2.8% fall. China has been struggling with falling prices much of this year, which contrasts with many other parts of the world where central banks are focused on taming inflation instead. Deflationary risks are expected to persist into 2024, owing to the housing slump, which has suppressed demand and prices.
The growing deflationary pressures highlight the need for more supportive fiscal policy, according to Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd. Deflation can be dangerous for China’s economy as it can lead to a downward spiral of economic activity. This could lead to consumers holding off on purchases, businesses lowering production, and making monetary policies to stimulate the economy less effective. The central bank has sought to downplay the risks of deflation this year, with an advisor to the People’s Bank of China saying last month that those pressures are “temporary.”
Stronger Support
Recently, Beijing has turned to fiscal policy to spur domestic demand, increasing its budget deficit and encouraging banks to help local governments refinance debt at lower interest rates. However, it has been difficult for additional government spending to offset declines in demand coming from other sectors. Now, some are predicting further pressure on the economy in 2024. The weak CPI figures have been partly due to slumping pork prices, which affect the CPI basket due to its popularity among local diners. China has set an annual inflation target of around 3% this year, which it is nearly certain to miss. Proactive fiscal stimulus will be a vital part of China’s policy objectives next year, according to Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc.
— With assistance from Tom Hancock, Jasmine Ng, Jill Disis, and Yujing Liu
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