The National Bureau of Statistics of the Communist Party of China announced on Monday (September 9th) that, apart from food prices, most consumer prices have hardly increased in the situation of declining income, exacerbating concerns about deflation. Deflation has been plaguing the Chinese economy since last year, and now there are signs of a spiral deflation, putting the outlook for the Chinese economy at risk of worsening.
According to Bloomberg, the speed of deterioration in China’s price outlook has surprised the market, with the “spiral deflation entering a dangerous new phase”. In the past four months, the inflation rate was below expectations for three months, with only a 0.6% increase in August, mainly due to a 2.8% rise in food prices. The core inflation rate in August only rose by 0.3%, staying below 1% for the 18th consecutive month.
Affected by factors such as insufficient market demand and the decline in international commodity prices, the Producer Price Index (PPI) for August fell by 1.8% year-on-year, marking the largest decline in four months. In comparison, the decrease in July was 0.8%.
The latest data shows that many manufacturers, food processors, and other industries in China are being affected by the overall economic downturn in demand.
Analysts from banks like BNP Paribas SA and Bloomberg Economics believe that China’s “GDP Deflation Index” is likely to continue its downward trend for the fifth consecutive quarter until 2025, marking the longest deflation trend since data recording began in 1993. The “GDP Deflation Index” is a more comprehensive economic price measurement index.
The severe downturn in China’s real estate industry has entered its third year, curbing domestic demand, while the intense competition in the manufacturing industry has also pushed down prices.
Despite efforts by Chinese officials to suppress discussions about deflation, warning analysts to avoid using the term, deflation has begun to enter public discourse. Former head of the People’s Bank of China, Yi Gang, stated last Friday (September 6th) that eradicating deflation must be the top priority for policymakers, a rare acknowledgement from top Communist Party officials that falling prices are threatening the economic outlook. He emphasized that officials should focus on eliminating deflationary pressures.
He further stressed that China’s “GDP Deflation Index” has been negative for the past few quarters. A negative “GDP Deflation Index” indicates the presence of deflationary forces in the economy.
Robin Xing, Chief China Economist at Morgan Stanley, stated, “We are definitely in a deflationary period, and likely entering the second stage of deflation.” “Japan’s experience shows that the longer deflation persists, China will eventually need more stimulus measures to break the debt-deflation challenge.”
The danger China faces, according to Bloomberg, is that deflation could snowball and worsen over time. Deflation prompts households feeling anxious due to declining wages to cut spending. Deflation also makes them delay purchases in anticipation of further price declines. This will affect business income, suppressing investment, leading to further salary cuts and layoffs, causing bankruptcies for both households and businesses.
A survey among the public has already shown signs of this. According to a survey by Caixin Insight Group and “Business Big Data Co.” in government-favored economic sectors such as electric vehicle manufacturing and renewable energy, primary wages in August fell nearly 10% below the peak in 2022.
A survey of 300 corporate executives by the Cheung Kong Graduate School of Business showed that labor cost growth last month was the weakest since April 2020.
Moody’s stated in an analysis report before the official Chinese data release, “Facing falling real estate prices and an unstable job market, families are tightening their belts.”
Expectations of deflation are spreading to the market, stimulating bond rebounds, driving yields to record lows, and exacerbating official concerns about banks being excessively exposed to interest rate risks.
According to The Wall Street Journal, Zhang Zhiwei, an economist at Shanghai-based Pinpoint Asset Management, said deflation remains a major risk for the Chinese economy. Zhang pointed out that non-food consumer prices in China fell by 0.3% in August compared to July.
Reuters quoted Junyu Tan, North Asia economist at Coface, saying, “The rebound in the (Chinese economy) is weaker than expected and does little to ease concerns about deflation.”
“The ongoing deflationary pressures can be attributed to the broader issue of excess capacity exceeding demand,” Tan added. “Government policies still overly focus on investment, so increasing fiscal expenditures could ultimately exacerbate the problem of excess capacity.”