Deflationary pressure in China is worsening as consumer prices increased at their slowest pace in two years, suggesting weakness in domestic demand and raising questions about the strength of the economic rebound.
The consumer price index rose by just 0.1% in April from a year ago, the lowest rate of inflation since February 2021, according to the National Bureau of Statistics (NBS) on Thursday. In March and February, it increased 0.7% and 1% respectively.
The producer price index, which measures factory-gate prices, declined by 3.6%, marking the biggest contraction in three years. It’s the seventh straight month the figure has fallen.
Prices are stagnating or falling in the country despite the fact that the People’s Bank of China (PBOC), the central bank, has been cutting interest rates and pumping cash into the financial system to bolster the economy.
There have been some signs of recovery in demand after the end of pandemic restrictions late last year, but consumers are still wary of spending on big-ticket items, such as property.
“The subdued inflation readings suggest post-Covid recovery momentum continued to weaken in April,” Nomura analysts said in a research note on Thursday.
The weak property sector recovery likely has exerted “persistent” downward pressure on the factory-gate prices, they added.
Real estate contributes as much as 30% to China’s GDP. It is still in the midst of a historic downturn, with new home prices increasing less than 0.5% in both March and February, after falling for more than a year.
A slump in the property sector affects demand for key raw materials such as steel and cement, which are key parts of the producer price index.
According to data released Tuesday by the customs authority, imports plunged 7.9% in April, indicating weak domestic demand. Exports were strong, up 8.5% from a year, although that was slower than the 14.8% growth recorded in March.
Instead of spending money, people are hoarding cash at a record rate. In the first quarter, deposits held by households nationwide grew by 9.9 trillion yuan ($1.4 trillion), up 27% from a year ago, according to data from the central bank last month. That came on the heels of a record $2.6 trillion rise in Chinese household savings last year.
Looking ahead, Nomura analysts expect consumer inflation to remain “fairly soft” in May, likely around 0.3%. Producer deflation will likely deteriorate, with the PPI expected to drop further by 3.9% on falling global commodity prices.
Although some government economists have recently warned the economy is facing deflationary pressure, Chinese authorities have dismissed such talk.
A spokesperson from the NBS said late last month the Chinese economy “does not appear deflated” and that deflation, which is defined as a sustained and broad decline in general price levels for goods and services over a period of time, was unlikely in the near term.
Deflation is bad for the economy because, in such an environment, consumers and companies may put off spending in anticipation of prices falling further, which would only exacerbate economic problems.
Zou Lan, an official with the PBOC, said at a press conference on April 20 that price increases are likely to return to the average levels of previous years in the second half of 2023.
Source : CNN