China’s Poor CPI, Factory-Gate Deflation Disappoint Analysts

People walk at a shopping mall in Beijing on Jan. 16, 2024. Pedro Pardo/AFP via Getty Images

News Analysis

Consumer inflation in China fell more than expected in March, and producer price deflation persisted, disappointing analysts and reinforcing the fact that a protracted housing crisis continues to weigh severely on consumer and business confidence.

The persistently low levels of inflation have also weighed on China’s recovery, adding urgency to calls for monetary easing to avert deflation and boost growth.

China’s consumer price index (CPI), a main gauge of inflation, edged up 0.1 percent in March from a year earlier, National Bureau of Statistics (NBS) data showed on Thursday. This was compared to a 0.7 percent rise in February when it had climbed above zero for the first time in six months during the Lunar New Year holiday.

Analysts polled by Reuters had hoped that the March CPI would rise at least 0.4 percent, year on year.

The increase in inflation observed during the February holiday season, coupled with a resurgence in tourism, had sparked optimism that Chinese households were rekindling their inclination to spend.

NBS data showed that on a monthly basis, however, the CPI went down 1 percent in March.

China’s producer pricing index (PPI), which measures the costs of products at the factory gate, fell 2.8 percent year on year in March.

NBS statistician Dong Lijuan attributed the changes in CPI data to seasonal easing of consumer demand and generally sufficient market supply in the month after the Spring Festival.

Analysts said that the persistence of easing consumer prices underscores the fact that deflationary risks still stalk the world’s second-largest economy.

“China inflation data is out with bad news,” Alicia Garcia Herrero, the chief economist for Asia-Pacific at the French investment bank Natixis, wrote on X, formerly Twitter, on Thursday.

“#CPI is still barely positive, and #PPI is even more negative. Producer prices are key for [the] #GDP deflator which is heading towards negative territory again in 2024 (that would be three years in a row).”

She added that persistently low prices also imply that export prices will remain soft, which is another indication of industrial overcapacity across all sectors of China.

Deflation Hurts

The subdued numbers come not only from China grappling with a prolonged property downturn and a sluggish job market but also from factors that have eroded consumers’ spending willingness and subdued market outlooks. Additionally, they coincide with escalating U.S. apprehensions regarding China’s expanding industrial overcapacity, notably in electric vehicles, solar panels, and batteries.

Since the country’s reopening in November 2022, Chinese policymakers have relentlessly tried to reignite economic growth momentum. From July 2023 onward, they intensified their actions by implementing significant measures spanning monetary and fiscal policy, property and capital markets, and industrial policies.

Nevertheless, despite these efforts, the nation’s vast underutilized manufacturing capacity has not found sufficient domestic demand to absorb it.

In the absence of this trend, the achievement of China’s economic growth target of approximately 5 percent this year hinges on demand from overseas.

Consequently, China’s policymakers have shifted their focus on boosting exports to generate overseas demand. However, this move has raised concerns among Western nations, which allege that China is dumping products and services on their shores at cut-throat costs to offset the domestic economic slowdown.

On Monday, for instance, U.S. Treasury Secretary Janet Yellen issued a stern warning to Beijing, reiterating Washington’s stance against the collapse of new sectors due to Chinese exports. China’s aggressive exports, she said, are threatening U.S. and European Union businesses.

Experts believe that given China’s global leadership in many manufacturing sectors, whenever the country’s producers compete head-on, middle-market companies globally face margin pressure and sharp price drops for their products.

Why the Pullback?

According to the NBS, the decline in CPI growth compared to the previous month was primarily attributed to food and travel service price reductions. Specifically, food prices witnessed a year-on-year decrease of 2.7 percent in March, marking a widening of the pace of decline by 1.8 percentage points compared to February, said NBS.

However, the core CPI, removing the food and energy prices, saw a modest year-on-year increase of 0.6 percent last month, indicating sustained mild growth.

Still, analysts say the March numbers prove that policymakers are under pressure to launch more stimulus as demand remains weak.

“To sustain the positive momentum we have been seeing in other economic indicators, policymakers will need to keep a proactive stance,” wrote HSBC Global Research in a note on Thursday, which was viewed by The Epoch Times.

From the monetary policy perspective, HSBC analysts expect the central bank, the People’s Bank of China, to stay supportive with more rate cuts of about 70 basis points in the next three months.