Deflation prompts renewed fears over strength of Chinese economy

A drop in consumer and producer prices in China has reinforced fears about the strength of the recovery in the world’s second biggest economy and increased pressure on the authorities to take more action to stimulate demand. Wednesday’s inflation figures came a day after official data showed bigger than expected falls in exports and imports as foreign direct investment (FDI) fell to its lowest quarterly level in two decades.

The consumer price index (CPI) for July fell by 0.3 per cent in its first year-on-year fall since February 2021, according to the National Bureau of Statistics (NBS). The producer price index (PPI) fell 4.4 per cent compared to a year earlier, seeing its 10th consecutive monthly decline following a fall of 5.4 per cent in June.

The Chinese authorities expect the fall in consumer prices to be temporary and to pick up over the next few months as the economy recovers. Core consumer inflation, which excludes food and energy, rose by 0.8 per cent in July compared to a year earlier, up from 0.4 per cent growth in June.

The official statistics bureau attributed the fall in consumer prices in July to the comparison with a particularly high level a year ago.

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“With the impact of a high base from last year gradually fading, the CPI is likely to rebound gradually,” said Dong Lijuan, chief statistician at the NBS.

The People’s Bank of China (PBOC), China’s central bank, said last week that inflation would be close to 1 per cent by the end of this year. This would see China escaping from a deflationary spiral but it is far short of the government’s consumer inflation target of 3 per cent.

Tuesday’s figures showed exports in July down 14.5 per cent from the previous year and imports down 12.4 per cent. Both figures were worse than analysts expected, and they point to slower economic growth in China.

Lower exports will mean less industrial production, while falling imports reflect weaker domestic demand. Balance of payments data published this week showed foreign direct investment (FDI) falling to $4.9 billion in the second quarter of 2023, its lowest quarterly figure since records began 25 years ago.

Exports by foreign companies operating in China account for 30 per cent of the total and these exports have fallen more sharply than others in recent months. Tensions between Beijing and Washington, export controls, trade sanctions and the impact of the war in Ukraine may also be contributing to the fall in exports.

Chinese consumer spending did not rebound as robustly as in western countries after the lifting of Covid restrictions, partly because the lack of measures such as furlough schemes in China left more people worse off after the end of the pandemic. And the authorities have struggled to address a prolonged slump in the property market, a sector that accounts for up to a quarter of economic output.

Country Garden, China’s biggest surviving property developer, on Monday missed $22.5 billion (€20.5bn) in interest payments on two US dollar bonds, raising fears that it could follow property giant Evergrande in defaulting on its obligations. The Chinese authorities have taken steps to support the property sector but have until now stopped short of a bailout.