China’s Recovery Still Shaky on Lackluster Consumer Demand

Containers are seen at the container terminal of Lianyungang Port, in China's eastern Jiangsu province, on July 13, 2023. STRINGER/AFP via Getty Images

China’s consumer prices dipped and factory-gate prices dropped slightly quicker than anticipated in September, indicating persisting deflationary pressures in the world’s second-largest economy.

China’s statistics bureau stated on Friday that with lowering food costs, the consumer price index (CPI) was unchanged from the same month a year earlier. In July, the index fell into negative territory, but in August, owing to rising energy prices, it edged up by 0.1 percent.

Lower food costs across key products, including poultry beef, pig, and vegetables, were blamed for the reversal to zero.

China’s official producer price index (PPI) remained negative in September at -2.5 percent, but up from a low of -5.4 percent in June, due to a recovery in domestic raw material costs on the back of improving global commodity prices. This somewhat cushioned the blow, according to a Nomura Asia Insights report accessed by The Epoch Times.

Since the rebound in domestic demand is still shaky without a big lift from fiscal support, analysts believe that a CPI inflation rate of zero reflects that deflationary pressure in China is still a genuine risk to the economy.

Household demand was sluggish too partly because the property industry slowdown is impacting confidence, they add.

Deflation is a drop in general price levels and is the inverse of inflation, which occurs when prices rise over time. It is often associated with economic downturns and can harm a country’s overall economy in a variety of ways.

For example, if consumers believe prices will fall next week or next month, they may postpone purchasing products or services, thereby suffocating an economy’s lifeblood: consumer expenditure.

When this happens, businesses may respond by laying off people, lowering wages, or making other changes.

“Admittedly the underlying trend was weak. The September CPI figures do suggest a negative month on month movement in the CPI index, [and hence, a concern],” Robert Carnell, head of research for Asia Pacific at ING told The Epoch Times.

Flirting with Disinflation?

But according to him, deflation is not the same as negative  CPI inflation. Deflation is a “malign force’ that includes falling prices for property, products and services, as well as negative money wages.

In September, he adds, most of the drop in Chinese CPI inflation was due to food prices, and mostly pork prices moving up—because of swine flu- that was not included in the index.

He also says that if one considers a month-to-month series, “which isn’t always easy to do with Chinese statistics,” then the CPI had been going up before September and it was only base effects that were bringing inflation down.

After a brief spell in negative territory in July, China’s August inflation data pulled itself back to a positive setting, though only just (0.1 percent).

“We and the market were expecting this slight improvement to continue in September. Instead, the September inflation rate has fallen back to nil year-on-year, and according to our calculations, this implies a small (0.1 percent point) decline in the underlying price level. That itself is quite disappointing because those same calculations showed that in the previous couple of months, most of the decline in inflation was due to the run-off of earlier food price shocks,” Mr. Carnell says.

While price inflation of most other food items declined in September, in the non-food categories, transport-related fuel prices and home-related utility costs hardened (from 0.3 percent in August to 0.5 percent in September). Rental prices too edged up, according to Nomura numbers.

In other words, Mr. Carnell says rather than deflation, China may be suffering from disinflation—when inflation rate falls but remains positive.

More Pain Ahead

Still, going forward Nomura anticipates the CPI inflation to turn negative again in year-over-year terms in October, at -0.1 percent, based on high frequency data showing that food prices have already begun to decrease sequentially in October, following just two months of rises.

China’s economy requires greater assistance than the supply-side initiatives that have already been implemented, says Mr. Carnell.

“[And] whatever [policy measure] does emerge from Beijing over the coming months, it likely won’t be quick enough to make any meaningful difference to 2023, and at best, it should be viewed as a pain management tool for the transition to a less leveraged economy,” he said. “And that is a multiyear project.”