Home

China faces deflation

PUBLISHED

2023-08-09

Content

The world's second biggest economy slid deeper into deflation last month, with no immediate sign of how it can escape this price vice without a massive spending campaign.

Consumer prices contracted for the first time in more than two years (since the pandemic), as the government of President for Life, Xi Jinping, struggles to revive consumption.

The consumer price index fell 0.3% year on year in July, down from no change a month earlier. The producer price index, a gauge of prices as goods leave factory gates, was down 4.4% in July, slightly better than June's 5.4% drop.

The outcome was slightly better than forecasts for a 0.4% read, but it was the first fall since February 2021 when the Chinese economy was being crunched by the pandemic.

Month on month, the CPI rose 0.2% from June, according to the National Bureau of Statistics' data. Excluding food and energy prices, China's so-called core CPI rose by 0.8% from a year ago, but that is not taken seriously given the enormous influence pork prices, in particular, have on the CPI and consumer spending.

In fact, a 26% year-on-year drop in pork prices drove the fall in July.

Coming a day after double-digit falls in both exports and imports in July, it is clear the Chinese economy is in need of something more dramatic than what we have seen from the government.
Exports fell 14.5% in July from a year ago, while imports dropped by 12.4%—both steeper falls than forecast by the market.

The sharp decline in the imports figure was partly due to commodity price weakness; imports of iron ore, copper, and oil from June, while coal imports were all but steady due to high demand from power stations in a heatwave.

August 15 sees China releasing data on retail sales, industrial production, and investment, which will confirm the softness across the economy.

Fiddling at the edges would be the best way to describe some of the policies, though the tax subsidies for purchasing new energy vehicles, in particular, remain a very tangible bit of help for prospective car buyers.

Author