The latest inflation data from China is anything but ordinary, likely keeping high-ranking officials in Beijing awake at night. The complete absence of consumer inflation signals deeper issues facing Chinese consumers than even the real estate crisis, despite the severity of the latter. Simultaneously, the decline in producer price index indicates that beyond consumer issues, Beijing’s policymakers have exacerbated the situation by distorting China’s economy.
The worrisome price data released by the National Bureau of Statistics of China reveals concerning trends. In June, consumer prices rose by a mere 0.2% compared to a year ago, significantly below the consensus expectations of 0.4% and even lower than the 0.3% rise in May. While such figures may be welcomed in a nation plagued by inflation, for an economy like China’s that urgently needs to stimulate consumer spending, it signifies failure.
Meanwhile, what the Chinese statisticians term “factory gate prices,” equivalent to producer prices elsewhere in the world, decreased by 0.8% in June compared to a year earlier. This marks the 21st consecutive month of such declines, highlighting persistent downward price pressure due to oversupply. Chinese factories are producing goods beyond the demand of both Chinese and foreign consumers.
The root of these issues lies in the lackluster performance of Chinese consumers. Their reluctance to spend comes as no surprise given the overall economic slowdown in China, which has suppressed wage levels. Even if wages have not declined absolutely, they fall short of the expectations formed during the period of China’s long-term high-speed growth. These developments have most significantly impacted the middle and lower-income groups in income distribution.
During the global COVID-19 pandemic and for a considerable period following the implementation of the Chinese government’s zero-COVID policy, the aftermath of shutdowns and disrupted work left Chinese workers feeling unable to earn as they previously envisioned, further undermining consumer confidence. To compound matters, the real estate crisis has led to a decline in residential property values. According to data from China Real Estate Information Corp (CRIC), the prices of residences reported by the 100 largest real estate companies in China have dropped by about 17% compared to a year ago. As most Chinese individuals’ wealth is tied up in their homes, both the sense of wealth and willingness to consume have been affected.
The decline in producer prices reveals a more ominous undercurrent. Last year, the Chinese government, dismayed by subdued consumer spending, sought to boost the economy by enhancing manufacturing capabilities in sectors anticipated to shape the future—such as advanced electronics, batteries, electric vehicles (EVs), and solar panels. However, the clear indication from the decrease in producer prices is that the demand for the added capacity is insufficient. Undoubtedly, such issues would arise in any scenario, but they have become particularly acute due to Western countries taking action to restrict various imports from China. The US and EU have imposed varying tariffs on Chinese-made electric vehicles, batteries, and solar panels, with the US imposing a broader and more stringent range of duties than Europe. Clearly, the US and EU have taken necessary actions.
Consequently, over the past five months, China’s exports to the EU and the US have declined by 10% and 17%, respectively. Despite these declines, China’s overall exports have still risen, primarily due to a 60% surge in exports to Russia, around a 17% increase in exports to Latin America, and a 7% increase in exports to Southeast Asia. The significant growth in sales to Russia reflects China becoming one of the few remaining sources for the country after comprehensive Western sanctions. The growth in sales to Latin America and Southeast Asia mainly underscores the shipping of components to Chinese factories to circumvent US and European restrictions. The US and EU are taking various measures to thwart this maneuver.
Even though Chinese products are widely welcomed by Americans and Europeans, the Chinese government’s strong push to bolster manufacturing capacity to substitute for weak consumer demand is misguided. International institutions like the International Monetary Fund (IMF) have long advised the Chinese government to reduce reliance on exports of finished goods and focus more on growth driven by domestic demand. At times, the Chinese government has accepted this advice and claimed such adjustments as part of its policies.
The decision by the Chinese government to emphasize manufacturing last year contradicts this necessary fundamental adjustment, particularly untimely given the shifting attitudes in the US and EU. The significant drop in factory gate prices clearly illustrates a grave mistake, accentuating the deep-seated problems in the Chinese economy, making it challenging for a quick turnaround.
This article is a translation and rewrite of a piece originally published in the English edition of Epoch Times.