2023-05-11 15:33:24
While most of the world is struggling unsuccessfully with galloping inflation, in China, the exact opposite problem is emerging – deflation. According to the National Bureau of Statistics, the consumer price index in April rose purely symbolically – by 0.1% compared to last year, which is the lowest since February 2021. In March and February it increased by 0.7% and 1% respectively.
The producer price index, which measures selling prices, fell 3.6%, the biggest decline in three years. This indicator has been falling for the seventh month in a row.
Such data speaks to weakness in domestic demand and raises questions regarding the strength of the Chinese economic recovery. Prices in the country are stagnating or falling despite the efforts of the People’s Bank of China, which is cutting interest rates and pumping cash into the financial system to support the economy.
Stores lose to the “pods”
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China has shown some signs of a recovery in demand since the lifting of tough pandemic-related restrictions late last year, CNN recalls, but consumers remain wary of spending money on high-value goods such as real estate.
“Submerged inflation readings indicate that the momentum for the post-COVID-19 recovery continued to weaken in April,” Nomura analysts wrote in a note.
In their opinion, the weak recovery of the real estate sector is likely to have put “permanent” downward pressure on factory prices. New home prices rose by less than 0.5% in March and February following a long (more than a year) period of decline. Meanwhile, real estate contributes up to 30% to China’s GDP.
The downturn in the real estate sector is affecting demand for key commodities such as steel and cement, which are key elements of the producer price index.
Another sign of weak domestic demand is the decline in imports: by 7.9% in annual terms in April. At the same time, exports increased by 8.5%, although this is almost half of its March growth of 14.8%.
Instead of spending money, the Chinese are accumulating cash at a record rate. Household deposits across the country rose by 9.9 trillion yuan ($1.4 trillion) in the first quarter, up 27% from a year ago, according to the Chinese central bank. This comes on the heels of a record $2.6 trillion rise in Chinese household savings last year.
Controversial Trends
Analysts at Nomura expect consumer inflation to remain “quite weak” in May, likely around 0.3%, while manufacturing deflation will intensify.
Deflation is bad for the economy because in such an environment, consumers and businesses can delay spending in anticipation of further price declines, which will only exacerbate economic problems.
“In one word, to describe the current economic situation in China, we can say that deflation has begun, and the economy has moved into recession territory,” said Liu Yuhui, a professor at the Chinese Academy of Social Sciences (CASS), a leading state think tank, in late April.
But the Chinese authorities have not yet recognized the problem. The representative of the National Bureau of Statistics with the presence of signs of deflation in the Chinese economy did not agree and added that it is also unlikely in the near future.
Chinese Central Bank spokesman Zou Lang said at a press conference on April 20 that price increases are likely to return to the average level of previous years in the second half of 2023.
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