China’s Easing Deflation Provides Temporary Relief but Remains a Minor Concern
China’s consumer price rebound in February has brought temporary relief from deflationary pressures on the economy, but experts caution that the challenges still remain. While the increase in consumer prices is a positive sign, it is overshadowed by imbalances in the manufacturing sector, weak consumer demand, and the ongoing drag from the property sector.
According to data released by Beijing’s National Bureau of Statistics (NBS), China’s consumer price index (CPI) rose 0.7 percent year-on-year in February, reversing a 0.8 percent drop in January. The rise in CPI can be attributed to increased demand during the Lunar New Year observed between February 10 and February 24. Consumer prices increased year-on-year for the first time in 11 months, boosted by increases in major commodities such as pork and fresh vegetables, as well as travel during the seasonal rush around the Lunar New Year.
However, experts argue that the true state of the economy is reflected in sectoral numbers rather than just headline statistics. Natixis Research notes that while China’s deflationary pressure has eased, the growth model still favors manufacturing sectors, leading to an imbalance between supply and demand. The rebound in China’s service activity is mainly responsible for the easing of core deflation.
China’s producer pricing index (PPI), which measures product prices at the factory gate, fell 2.7 percent year-on-year in February. The gap between supply and domestic manufacturing demand is expected to continue, posing challenges for overcapacity issues and deflationary pressures down the road.
China’s deflation has been a global concern since July 2023 when consumer prices fell 0.3 percent from the previous year, marking the first time in almost two years that the country suffered deflation. Falling prices can lead to a heavier debt burden and slower growth for China, along with other challenges such as ballooning local government debt, housing market issues, and high youth unemployment.
The international community is also concerned about China’s deflation due to its status as a major global producer. Deflation in China can have ripple effects, potentially flooding global markets with cut-price Chinese goods and impacting manufacturers elsewhere. China’s deflation is already adding to disinflationary pressure and trade tensions in advanced countries.
Beijing is facing difficulties in regaining consumer confidence and domestic demand, which have been affected by the protracted housing downturn. Chinese Premier Li Qiang has vowed to transform the country’s development model and address risks fueled by bankrupt property developers. However, experts believe that the most effective way for China to raise consumption would be to improve demand.
While the rebound in the CPI in February may temporarily alleviate concerns about deflation, experts predict that inflation could remain weak for most of the first half of 2024. Policymakers will need to maintain a proactive stance in order to navigate the ongoing challenges and ensure sustainable economic growth.
Overall, China’s easing deflation provides temporary relief but remains a minor concern. The economy still faces imbalances, weak consumer demand, and the persisting drag from the property sector. It is crucial for policymakers to adopt a proactive approach and focus on improving domestic demand to ensure a sustainable recovery.
