China can’t shake deflation | Mint

China can’t shake deflation

The weak inflation figures add to a run of signals suggesting that China’s economy is losing momentum again. (Bloomberg)
The weak inflation figures add to a run of signals suggesting that China’s economy is losing momentum again. (Bloomberg)

Summary

Consumer prices fell again last month, the latest sign of economic weakness.

SINGAPORE : Consumer prices in China fell for the second straight month, a deepening bout of deflation that shows Beijing’s efforts to reignite faltering growth are falling short.

China’s top leaders telegraphed Friday that more support is coming for the economy, with pledges of new fiscal stimulus and supportive central-bank policy in the months ahead.

Still, the Communist Party’s ruling Politburo signaled that stimulus will be measured rather than aggressive, reinforcing expectations for steady if unspectacular growth in 2024 as the economy grapples with a drawn-out property bust and a global backdrop darkened by war and slowdowns in the U.S. and Europe.

Consumer prices in China tumbled 0.5% in November compared with a year earlier, China’s National Bureau of Statistics said Saturday, steeper than October’s 0.2% fall.

Prices charged by companies at the factory gate also fell in November at a steeper annual rate than in October, as firms slashed prices in an effort to beef up sales.

The weak inflation figures add to a run of signals suggesting that China’s economy is losing momentum again after modest interest-rate cuts and other small stimulus steps drove a pickup in growth in the third quarter.

Exports rose by only 0.5% in November after several months of decline, while surveys pointed to a contraction in activity at factories and in services. New home sales continued to drop in October. The data point to a weak close to the year, economists say.

China’s economy had been expected to grow strongly in 2023 as the dismantling of Beijing’s draconian Covid-19 controls powered a potent consumer-led rebound. Instead, consumers mostly socked away savings as a deep property slump dragged on. Slowing spending overseas sapped demand for China’s exports.

The deflation China is experiencing reflects both weak consumer spending as well as bloated supply, as China’s factories hack at prices in an effort to unload bulging inventories of goods.

The prospect of a flood of Chinese cars, solar panels and other industrial goods hitting global markets in the years ahead has stoked new trade tensions with the U.S. and European Union. 

At a summit with Chinese leader Xi Jinping in Beijing Thursday, European Commission President Ursula von der Leyen called for more balanced trade with China after the bloc’s deficit with the world’s second-largest economy ballooned to more than $400 billion, blaming the shortfall on a lack of market access for foreign firms, preferential treatment for Chinese companies and Chinese overcapacity.

Falling prices in China contrast sharply with the U.S. and other major economies, where central banks have only recently throttled back an aggressive campaign of interest-rate increases aimed at taming rocketing inflation fueled by supply-chain snarl-ups and surging postpandemic spending.

Policy makers in China have dismissed weak price-growth readings as a temporary blip, driven by big swings in prices for some consumer staples. Prices for pork, for instance, fell 32% in November compared with a year earlier. 

Many economists agree—though they caution that officials shouldn’t be complacent about the risk of a more prolonged spell of deflation if they can’t shake consumers and businesses out of their torpor.

In a research report Thursday, BCA Research chief emerging market and China economist Arthur Budaghyan warned that if prices continue to fall in China they will hit corporate profits and prompt layoffs—putting the economy at risk of going into a downward spiral of falling prices, spending and employment.

“Deflation is already pervasive in the Chinese economy," he said, adding that the economy needs lower interest rates and a weaker currency.

Officials are expected to convene in the coming days for a conference on the economy, after which they are due to publish new plans for growth and other economic priorities. 

Economists hope for more detail on stimulus and how the authorities plan to manage a rebalancing of the economy away from real-estate-driven investment and toward advanced manufacturing and consumption.

As well as cutting mortgage rates and easing requirements for home purchases in large cities, China last month unveiled a plan to issue 1 trillion yuan, equivalent to around $137 billion, in debt to support the economy.

Economists at Citi said in a note to clients Friday they expect officials to set a growth target for 2024 of around 5%, matching this year’s modest goal.

Many economists, though, have penciled in slightly weaker forecasts for next year, since the economy benefited in 2023 from a favorable comparison with 2022, when lockdowns in major cities including Shanghai and Shenzhen hammered growth.

The International Monetary Fund, for instance, expects growth in China to slow to 4.6% in 2024, from 5.4% this year.

Grace Zhu in Beijing contributed to this article.

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