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HONG KONG—China’s consumer prices fell for a third straight month in December, underscoring the challenges Beijing faces in reviving its economy as deflationary pressures persist.
An index of prices charged by Chinese manufacturers, meanwhile, contracted for a 15th straight month. That is a source of growing concern for U.S. and European officials, as some Chinese business owners look to unload more low-cost goods on the rest of the world, competing with Western brands.
Chinese leaders have been struggling to reignite domestic demand for months, after a hoped-for rebound in economic activity following the lifting of Covid controls fizzled. Instead, Chinese consumers, spooked by a weak property market and high youth unemployment, are skimping on spending. Factory owners are racing to cut prices as they face weaker sales at home.
All of that is creating a tricky situation for the rest of the world. Until recently, deflation in China was largely welcomed by Western economists, because it lowered the cost of imported goods from the world’s factory floor. That helped to reduce inflation in the U.S., which cooled through most of 2023, though it edged up some in December.
But the forces driving deflation in China are increasingly exacerbating trade tensions, as China’s weakened domestic demand results in more excess Chinese goods redirected abroad. The European Union last fall accused China of flooding the market with cheap electric vehicles and launched an investigation into the role of state subsidies from China.
“Persistent deflation or very low inflation in China could contribute to a higher trade surplus and more trade frictions with the rest of the world,” said Adam Wolfe, emerging markets economist at Absolute Strategy Research.
China’s central bank signaled last year that it believes deflation in the country is transitory. Despite repeated calls from economists for more aggressive steps to boost growth and consumer demand, Chinese policymakers have refrained from handing out cash or other forms of direct support for households.
Friday’s data provided at least some support for Beijing’s view. The consumer-price index dropped 0.3% last month from a year earlier, narrowing from a 0.5% drop in November, the country’s national statistics bureau said on Friday. The reading, mainly dragged down by oil and food prices, compares to a 0.4% fall expected by economists polled by The Wall Street Journal.
Stripping out volatile energy and food prices, core inflation was 0.6% last month.
But many economists say they believe deflationary pressures will be hard to reverse.
Wei Yao, chief Asia economist at Société Générale, predicted that while China’s consumer prices will likely rebound to 1% by the end of 2024, downward pressure on prices won’t ease quickly.
“In our view, deflationary pressure in China as a result of weak domestic demand could persist for quite some time,” she said.
For the full calendar year, consumer inflation reached 0.2% in 2023, far below the around 3% target set by Beijing, and confounding predictions by some from a year ago that inflation would surge in China after senior leaders abandoned Covid-19 restrictions in late 2022.
Producer prices, a gauge of wholesale prices charged at factory gates, dropped 2.7% on-year in December, compared with a 3% decline in November. The index has stayed in negative territory for 15 months in a row since October 2022.
Lower oil prices and insufficient demand for some industrial products weighed on producer prices, according to China’s statistics bureau.
Some economists fear China could slip into a debt-deflation spiral, in which falling prices prompt companies to cut wages and consumers to hold off purchases, creating a vicious cycle of even weaker demand and lower prices. Japan went through a similar experience starting in the 1990s, when the country entered a decadeslong period of economic stagnation with a shrinking population and elevated debt levels.
Steps Chinese authorities have taken in the past year have yielded minimal benefit so far.
The country’s central bank has trimmed interest rates several times. Officials also cut the costs for households to take out mortgages, and extended tax breaks for private business owners. China in October issued an additional $137 billion in sovereign debt to fund infrastructure projects.
Despite those measures, recent data have suggested the economy has lost steam after a pickup in growth in the third quarter. Surveys have pointed to a contraction in activity at factories and in services. New home sales have remained weak.
Zhongzhi Enterprise Group, one of the country’s largest trust companies, declared bankruptcy last week as turmoil in China’s housing market stretches on.
Forecasts by global investment banks point to a growth rate ranging from 4% to 4.9% for China’s economy this year. While that is high by global standards, it marks a slowdown from earlier years of China’s boom.
Many economists expect Beijing to maintain a slightly higher target of around 5%, which could signal that more stimulus will be on the way.
Some economists predict deflationary pressures will ease in 2024, as the cost of pork, which plays a major role in calculating China’s inflation, and oil prices rebound. Pork prices fell 26.1% in December, a slight improvement compared with November’s 31.8% decline.
“We expect deflation will end, but low inflation will stay in place,” noted economists from J.P. Morgan.
In a note to clients last month, Citi economists said China would likely cut policy rates from the second quarter this year due to deflation concerns.
“There is no time for policy hesitation to prevent a potential vicious loop between deflation, confidence and activities,” they wrote.
Write to Stella Yifan Xie at stella.xie@wsj.com
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