Chinese economy slips into deflation as recovery falters and demand slows
China’s economy has fallen into deflation after consumer prices fell year on year last month for the first time in more than two years, official data shows, as slowing domestic spending weighs on the country’s post-Covid economic recovery.
The consumer price index, the main gauge of inflation, fell 0.3% in July, the National Bureau of Statistics of China (NBS) said, having flatlined in June. A survey of analysts had anticipated a 0.4% year-on-year decline.
July’s data was China’s first negative inflation reading since early 2021, when prices were weaker as the Covid-19 pandemic hit demand, and pork prices fell.
Separate figures released on Tuesday showed the country’s imports and exports fell more sharply than expected last month, amid waning global demand for Chinese products.
Retailers in China have been hit by a slowdown in sales. Businesses that stocked up on goods in expectation of a surge in demand after pandemic restrictions were lifted are now under pressure to cut prices.
The cost of cars has also fallen after Tesla triggered a price war in China’s electric vehicle market by reducing its prices.
Falling food prices also pulled down the cost of living. China’s core inflation rate, which strips out food and energy costs, rose to +0.8% year on year, up from +0.4% in June.
The country’s factories are already charging less for their goods, as they react to weakening demand after commodity prices fell. China’s producer price inflation, which tracks prices at the factory gate, was -4.4% in July, after a 5.4% year-on-year drop in June.
The Chinese economy’s slide into deflation is expected to lead to more calls for government stimulus, as Beijing also tries to address weakening trade activity and the slowdown in China’s property sector.
Elsa Lignos, the global head of FX strategy at the investment bank RBC Capital Markets, said: “There is an expectation that this will add pressure to policymakers to deliver stimulus though so far measures have been cautious.”
Analysts said the drop in Chinese inflation rates could help to ease price pressures in the west. Deflation in
China “should help inflation in the US and Europe to moderate”, said Ding Shuang, the chief economist for greater China and north Asia at Standard Chartered bank.
But Tom Hopkins, a portfolio manager at BRI Wealth Management, said the data was a clear sign that the Chinese economy was weakening, which would spark concern for EU companies and economies for whom China was a key trading partner.
“China moving into a deflationary state bucks the trend of most western nations, which have been struggling with the opposite problem of high inflation,” Hopkins said.
Authorities have played down concerns about deflation. Liu Guoqiang, a deputy governor of the China’s central bank, last month said there would be no deflationary risks in China in the second half of the year, but noted the economy needed time to return to normal after the pandemic.
The Chinese government has set a consumer inflation target of about 3% this year.
The NBS predicted inflation would pick up in coming months, with its chief statistician, Dong Lijuan, saying: “With the impact of a high base from last year gradually fading, the CPI is likely to rebound gradually.”
Despite recent policy stimulus, consumers and manufacturers remained cautious amid the still-weak housing market, high youth unemployment and a diminishing appetite among foreign firms to invest in China.
Falling prices may sound attractive to consumers in the west, where inflation hit its highest levels in decades last year. In the UK, consumer prices were 7.9% higher than a year ago in June, as households suffered a long run of falling real incomes.
But deflation can hurt economic growth, as consumers will delay buying products if they think they will be cheaper in the future. This leads companies to cut back on investment as their profits shrink and can end with a freeze on hiring or the laying off of workers.
Chinese authorities have reportedly put pressure on high-profile local economists to avoid discussing negative trends in the economy, including deflation, the Financial Times reported.
Jim Reid, a strategist at Deutsche Bank, said the latest trade data highlighted that the Chinese economy was being “dragged lower by weakness in global demand and a domestic slowdown”.
The Biden administration is planning to ban private equity and venture capital investments in some Chinese technology companies, in an executive order expected to be released on Wednesday.
It will prohibit some US investments in sensitive technology in China, and require that the government be notified of other investments, a senior government source told Reuters.
The White House’s aim is to try to prevent US capital and expertise from helping to develop technologies that could support China’s military modernisation and threaten US national security.