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Chinese Economy Remains Stubbornly Sluggish

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2023-04-11

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China’s economy is in desperate need of a stimulus whack that the Communist party government led by President Xi Jinping doesn’t want to administer.

Despite activity surveys showing the clear impact of the re-opening of the Chinese economy on its huge manufacturing and service sectors, inflation figures released on Tuesday tell a very different story - an economy staggering on the edge of consumer price deflation and deeper producer price deflation.

After several months of disinflation (weak or no price growth), the Chinese economy seems to have sagged into deflation - mild at this stage but the worry is that all the signs of a resurgent economy is fading, with no policy changes to halt the slide.

The National Bureau of Statistics said in Tuesday’s release that the country’s annual inflation rate unexpectedly slowed to an annual rate of 0.7% in March, from the weak 1.0% in February and was the lowest monthly growth figure since September 2021.

Month on month inflation fell 0.3% in March from February when it fell 0.5% (which was blamed on the impact of the week-long new Year holiday break).

But the data confirms that in the past two months, Chinese consumer prices have moved from disinflation to deflation.

That means that after the 0.8% rise in January from December, inflation was flat in the first three months of 2023, a sign there is no pricing pressure anywhere and a confirmation of weak demand from households and consumers generally.

Chinese producer prices again fell - down an annual 2.5% from the 1.4% rate in February. Like consumer prices, there was no movement in producer prices for a second month in a row.

It was the sixth straight month of producer deflation and the steepest fall since June 2020 amid easing commodity prices, especially coal, other energy and agicultural commodities such as grains and dairy products.

Signalling the growing domestic price weakness across the economy, Chinese steel prices have fallen noticeably in the past month or so.

The benchmark Shanghai rebar futures ending at 3,946 yuan ($US574) a tonne on Monday, the lowest since December 26 and down 8.8% from the peak so far this year of 4,328 yuan ($US615) on March 14.

Normally at this time domestic steel prices rise because of the approach of the summer building season but with the construction and property sectors weak, price pressures have faded.

That has seen iron ore prices fall in the past month - down 11% since hitting its peak so far in 2023 around $US133.40 in mid-March.

That was reached amid investor optimism over future steel demand as Beijing moved to stimulate the economy after ending its strict zero-COVID policy.

Coking coal prices have also fallen, with the SGX (Singapore Exchange) price that track the free-on-board price in Australia, the world's largest exporter, dropping to $US289.90 a tonne on Monday.

This is the lowest price since the end of 2022 and the contract has lost 24% since its 2023 peak of $US381 tonne on February 17.

LNG prices in northern Asia have also fallen sharply to around $US12.60 a million British thermal units (MMBtu) - that’s half the December 30 level of more than $US24 a MMBtu.

China does import gas by pipeline as well as LNG, so it is not as big an influence in the seaborne lNG market as it is in coking coal or iron ore. But its buying still impacts prices and imports so far this year are down a reported 9%.

Even if China’s trade figures for March, to be released on Thursday, show an improvement from the weak performances in January and February, they will not be convincing.

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