China is on the brink of deflation. China’s economy teetered on the verge of deflation in June, witnessing Beijing’s producer prices falling at their fastest pace in over seven years, while consumer prices teetered on the edge predicting a looming China deflation, adding to calls for Beijing to launch a stronger stimulus package to sustain China’s sputtering post-COVID recovery.
China’s inflation rate for consumer was flat in June while factory-gate prices fell further, fueling concerns about China’s deflation risks and adding to speculation about potential economic stimulus.
The producer price index (PPI) fell for a ninth consecutive month in June, down 5.4 per cent from a year earlier, the National Bureau of Statistics (NBS) said on Monday, the steepest decline since December 2015. The (CPI) consumer price index of China was unchanged year-on-year, compared with the 0.2 per cent gain seen in May, driven by a faster fall in pork prices.
What is deflation?
Deflation is exactly opposite of inflation. It occurs when prices of assets and goods decrease across the economy. That dashed expectation for a 0.2 per cent rise and was the slowest pace since February 2021, seemingly leaning towards China’s deflation.
Deflation can also be caused by the supply of money being reduced or credit availability being lowered, as per Economic Times. When prices of goods and assets go down, thus increasing the purchasing power of consumers, leading to deflation.
Sounds like a good thing, right? Not so.
Deflation occurring means a recession could be on the horizon. People, witnessing prices of goods decrease, delay spending. However, this lack of spending means less income for producers of products which in turn can cause unemployment to rise and interest rates to increase. This feeds on itself creating what experts refer to as a ‘doom loop’.
According to Economic Times, central banks usually counter deflation by increasing the flow of money into the economy. Central banks also make borrowing easier, increase expenditures and cut taxes to fight deflation.
What does it mean for China to face deflation?
Momentum in China’s post-pandemic recovery has slowed from a brisk pickup seen in the first quarter with demand for industrial and consumer products weakening, raising concerns about the health of China.
Experts say this bodes badly for China. As per chief economist Zhang Zhiwei of Pinpoint Asset Management, there is a real risk of China facing deflation.
“We think the more challenging deflation environment and sharp slowdown in growth momentum support our view that the PBOC has entered a rate-cutting cycle,” said economists at Barclays in a research note.
Will this lead to recession?
China’s inflation rate for food rose in June partly because of higher prices for vegetables, which increased 10.8 per cent year on year compared with a decline of 1.7 per cent in May. As per a report, the too low China inflation rate supports that there is going to be two more rounds of policy rate cuts. Some experts are expecting a “bazooka”-style stimulus. “Despite the fact China’s deflation is quite near, it doesn’t look like the PBoC is looking at monetary stimulus of the kind the US Fed or European Central Bank would be doing.”
Nomura expects consumer prices to fall 0.5 per cent year-on-year in July, even taking into account a potential rise in China’s inflation rate in service as a result of the summer holiday season.
The weaker-than-expected China’s inflation rate readings knocked financial markets with the yuan falling and Asian stocks also dipping into the red.
China’s inflation index remains flat for now. Average China’s inflation rate for consumer has been set at a target of 3% in 2023. Prices rose 2% year-on-year in 2022.
What can China do?
As per report, Beijing needs to shift focus from supply-side policies. “China is facing excess supply now,” ANZ senior China strategist Xing Zhaopeng said.
He warned of an intensifying “deflation-recession loop”.
China last month cut policy rates to boost liquidity and vowed to take measures to promote household consumption.
For producer prices, the biggest year-on-year declines were seen in energy, metals and chemicals as domestic and foreign demand weakened.
Exchange rate
China’s onshore yuan opened at Rmb7.2256 to the dollar and was Rmb7.2339 at midday, slightly weaker than the previous late session close, Reuters reported.
