China’s consumer inflation unexpectedly eased in September, while producer price deflation deepened, underscoring the mounting pressure on Beijing to roll out more robust stimulus measures to revive its flagging demand and economic activity. As the world’s second-largest economy struggles to regain momentum after grappling with prolonged disruptions caused by the COVID-19 pandemic, many analysts are now urging the Chinese government to address both immediate economic concerns and deeper structural issues.
At a press conference on Saturday, China’s Finance Minister Lan Foan indicated that there would be more “counter-cyclical measures” implemented before the year ends. However, the lack of specific details on the size or scope of the upcoming fiscal stimulus has left investors waiting anxiously, hoping that the measures will ease the deflationary pressures that have cast a shadow over the nation’s economic prospects.
Inflation Data Shows Easing Consumer Prices, Declining Producer Prices
According to data released by the National Bureau of Statistics (NBS) on Sunday, China’s consumer price index (CPI) rose by 0.4% year-on-year in September, a slight dip from the 0.6% increase seen in August. This rise also fell short of the 0.6% forecast in a Reuters poll of economists, adding to concerns that the country is facing weaker-than-expected inflationary pressures.
On the other hand, the producer price index (PPI) – a measure of the average changes in prices received by domestic producers for their output – continued its downward spiral. The PPI fell by 2.8% year-on-year in September, marking the fastest pace of decline in six months. This sharp drop followed a 1.8% decline in August, further highlighting the deepening deflationary pressures in China’s manufacturing and industrial sectors. The figure also missed the 2.5% decline predicted by economists.
The combination of easing consumer prices and deepening producer price deflation suggests that China is struggling to strike a balance between maintaining price stability and ensuring that its economy continues to grow. These inflationary and deflationary trends signal weakening demand, which is a critical factor in determining the health of China’s economy.
lower Consumer Price Growth and Producer Price Deflation
The cooling of consumer price inflation points to broader challenges facing China’s economy, including sluggish domestic consumption and a faltering recovery in consumer spending. Many experts attribute the weaker CPI numbers to a combination of factors.
- Sluggish Consumption: Despite efforts to stimulate spending, consumers remain cautious in the post-pandemic environment. Weak demand is hampering China’s ability to stimulate broader economic growth through consumer spending.
- Excessive Domestic Investment: Overcapacity in several industries has resulted in suppressed prices as companies struggle to find sufficient demand for their goods and services. This has led to lower profitability and, in some cases, layoffs and wage cuts.
- Impact of Property Sector Slump: The ongoing slump in China’s once-thriving property sector has dragged down confidence and domestic demand. Real estate has historically been a major driver of economic growth in China, but the sector is now facing severe headwinds due to mounting debt and oversupply issues.
The decline in the producer price index adds to concerns that China’s industrial base is not generating enough value to support long-term economic growth. The sharp fall in PPI highlights the downward pressure on prices in sectors like manufacturing, mining, and construction, which have been hit hard by excess capacity and weak demand. These deflationary pressures are forcing companies to cut costs, often by reducing wages or laying off workers.
Chinese authorities have stepped up stimulus efforts in recent weeks, rolling out various initiatives aimed at shoring up demand and achieving the government’s economic growth target of around 5.0% for 2024. These efforts include aggressive monetary support measures introduced by the central bank in late September, which marked the most significant intervention since the COVID-19 pandemic.
- Cuts to Mortgage Rates: In an effort to support the ailing property sector, the central bank has cut mortgage rates, hoping to stimulate demand for housing and encourage investment in real estate.
- Credit Easing: The central bank has eased credit conditions to provide more liquidity to businesses and consumers, with the aim of jump-starting investment and spending.
However, analysts argue that these moves may only offer temporary relief, as they do not address some of the more deeply-rooted structural issues facing China’s economy. Many are now looking to a meeting of China’s parliament, expected to take place in the coming weeks, for more concrete details on the government’s plans.
“There is a real need for more targeted and substantial fiscal stimulus,” said a senior economist at a leading Chinese think tank. “The current measures are a good start, but they don’t go far enough. What we need are policies that tackle the underlying problems of overcapacity, weak domestic consumption, and the struggling property sector.”
Finance Ministry Vows to Implement “Counter-Cyclical” Measures
During Saturday’s press conference, Finance Minister Lan Foan hinted at further measures to come but stopped short of providing specific details. Investors and economists alike are eager to know the scale of the fiscal stimulus being planned, especially in light of the worsening deflationary pressures.
The term “counter-cyclical measures” refers to fiscal or monetary actions taken by governments to counteract economic fluctuations. These measures typically include increased government spending, tax cuts, or changes in interest rates to stimulate demand and boost economic activity. However, without clarity on the size or focus of these measures, it remains unclear how much of an impact they will have on China’s economy in the short term.
Another key indicator of China’s inflationary trends is core inflation, which excludes the volatile categories of food and energy prices. In September, core inflation stood at just 0.1%, down from 0.3% in August. This suggests that even when excluding volatile items, price pressures remain weak, further indicating the presence of deflationary forces in the economy.
Food prices, which had shown some resilience in recent months, rose by 3.3% year-on-year in September, up from a 2.8% increase in August. However, non-food prices fell by 0.2%, reversing a 0.2% gain in August. The decline in non-food prices was driven in part by falling energy prices and a drop in tourism-related costs, including airfares and hotel accommodation prices, according to the NBS.
The combination of low core inflation and declining non-food prices points to a broader weakness in domestic demand, which is further compounded by deflationary pressures in the manufacturing and industrial sectors. As a result, many economists are now calling on Beijing to prioritize measures that will stimulate demand and support growth across multiple sectors of the economy.
Structural Challenges: Overcapacity, Weak Demand, and Labor Market Struggles
China’s economic challenges are not limited to short-term fluctuations in inflation and deflation. The country is also grappling with longer-term structural issues that are weighing on its growth prospects.
One of the most significant issues is overcapacity, particularly in sectors like steel, coal, and construction. Excessive investment in these industries has resulted in a glut of supply, which has pushed down prices and profitability. To cope with falling revenues, many companies have been forced to cut wages or reduce their workforce, exacerbating the problem of weak domestic consumption.
Another key challenge is weak demand from both consumers and businesses. Despite government efforts to stimulate spending, consumer confidence remains low, and many households are opting to save rather than spend. This cautious approach to spending is holding back the recovery and limiting the effectiveness of the government’s stimulus measures.
In addition, China’s labor market is under strain, with rising unemployment and stagnant wage growth in some sectors. The combination of these factors is putting pressure on households, which in turn is dampening demand for goods and services.
What’s Next for China’s Economy?
The outlook for China’s economy remains uncertain. While the government has signaled its intention to implement more counter-cyclical measures, it is unclear whether these efforts will be enough to reignite growth and prevent deflationary pressures from deepening.
Many analysts believe that stronger measures, such as large-scale fiscal stimulus or reforms aimed at boosting productivity and consumption, will be needed to achieve sustained growth. Without such actions, there is a risk that China’s economy could continue to struggle with weak demand, overcapacity, and deflationary pressures.
In the coming weeks, all eyes will be on Beijing as the government prepares to unveil more details about its economic strategy. Investors and economists alike will be hoping for bold measures that not only address the immediate challenges facing the economy but also lay the groundwork for long-term stability and growth.
China’s economic recovery remains fragile, and the government’s ability to navigate these challenges will be crucial in determining the future trajectory of the world’s second-largest economy.
