China’s economy, the second largest in the world, is continuing to face subdued demand as consumer inflation slowed in October, suggesting a need for sustained policy support to revitalize consumer activity and stabilize the market. Official data released on Saturday by the National Bureau of Statistics (NBS) reveals that the consumer price index (CPI)—a key measure of inflation—rose just 0.3% year-on-year, down from a 0.4% increase in September. The new data falls below the forecast of 0.4% in a recent Bloomberg survey of economists, underscoring China’s ongoing struggle with economic stagnation.
The announcement comes in the wake of efforts by Chinese authorities to mitigate economic pressures, especially those stemming from a protracted property sector crisis and decreased consumer confidence. As global economies face high inflationary pressures, China remains an outlier with persistent deflationary trends, prompting concerns from economic analysts about the need for more robust stimulus measures targeted at boosting consumer demand.
At a time when countries worldwide are dealing with high inflation and attempting to control soaring prices, China has been grappling with the opposite challenge—persistently low or even negative inflation. While inflation in the United States, Europe, and other developed economies surged amid pandemic-related supply chain issues and energy crises, China’s inflation rate has remained low, reflecting unique domestic challenges, including a complex property crisis and slowing consumer demand.
In 2023, China experienced deflation for four consecutive months, with consumer prices witnessing their sharpest contraction in 14 years in January. This downward trend has continued, with the latest October figures signaling a deeper issue of deflationary pressure that could stymie long-term economic growth if not addressed effectively.
The decline in the CPI contrasts with the struggles faced by Western nations, underscoring the unique structure of China’s economic landscape. In China, consumption contributes around 38% to GDP—a figure lower than that in most developed nations where consumer spending forms a more substantial part of the economy. Therefore, even modest inflationary changes have outsized implications on domestic activity and economic confidence.
The property sector, long considered a cornerstone of China’s economy, is currently in turmoil. The sector, which contributes nearly 25% of GDP, has been in a slump for more than a year, with major developers struggling under the weight of mounting debts and an oversupplied market. High-profile defaults, including those from property giants like Evergrande, have spurred concerns that the economic impact could extend beyond the sector, curbing both household spending and investor confidence.
The property crisis has significantly influenced consumer sentiment and spending behaviors, contributing to the sluggish inflation rate. Chinese households, many of whom have substantial portions of their wealth tied to property investments, are hesitant to increase spending amid fears of declining home values and potential financial instability. Consequently, demand for goods and services has weakened, translating into low inflation figures.
In response to these mounting economic challenges, Chinese authorities have introduced various policies aimed at stimulating economic activity and increasing consumer demand. Recent government measures have included interest rate cuts, easing some restrictions on home purchases, and proposing adjustments to local government debt in an effort to increase fiscal spending.
Just a day before the inflation data release, Chinese lawmakers announced an ambitious plan to reduce local government debt, potentially freeing up more resources for infrastructure and welfare spending. This could provide some relief to struggling local economies and pave the way for greater consumer spending. Despite these measures, some analysts argue that the government’s efforts lack detailed implementation plans, creating uncertainty about the effectiveness and longevity of the policies.
Further complicating China’s inflation situation is the deflationary trend in factory-gate prices, or producer prices, which declined by 2.9% year-on-year in October—a slight increase from September’s 2.8% decline. The prolonged decrease in factory-gate prices, which began in late 2022, indicates weak demand for Chinese products, both domestically and internationally.
Factory-gate prices are often seen as a leading indicator of consumer inflation. When these prices decrease, companies may be forced to cut costs, leading to reduced wages or layoffs, which in turn lowers consumers’ purchasing power. This cycle of deflationary pressure, if left unchecked, can have a cumulative effect on the economy, stifling growth prospects over time.
In the face of these deflationary challenges, China’s Premier Li Qiang recently expressed optimism about meeting the country’s annual growth target of around 5% for 2024. This statement came despite a report showing that China’s GDP growth in the third quarter of 2024 was at its slowest pace in 18 months. Premier Li’s confidence suggests the government’s belief that policy interventions and structural adjustments will yield positive results in the coming months, although some economists remain skeptical.
China’s economic policymakers are expected to prioritize domestic stability and growth as the country approaches a critical period of global economic uncertainty, highlighted by a potential return of Donald Trump to the White House. Trump, known for his confrontational stance on U.S.-China trade relations, has pledged to reintroduce tariffs on Chinese goods—a move that could severely impact China’s export-oriented sectors.
The deflationary pressures revealed in the latest data have prompted calls from economic experts for a more targeted approach to stimulus that focuses on consumer spending. Zhiwei Zhang, Chief Economist at Pinpoint Asset Management, emphasized the need for stimulus measures aimed directly at the consumption sector, warning that generic stimulus could lead to overcapacity and inefficiency without effectively addressing the root issue of weak consumer demand.
Zhang argues that direct support for households and measures to enhance consumer confidence are crucial for revitalizing China’s economic engine. By stimulating household demand, the government can foster a more sustainable path to growth, reducing the risk of a prolonged deflationary cycle.
Looking forward, the Chinese government faces a delicate balancing act between promoting economic growth and maintaining stability. The prolonged slowdown in consumer inflation highlights the need for a shift in economic strategy that places greater emphasis on consumer-driven growth rather than relying heavily on exports and property investment.
If China’s policymakers manage to implement effective stimulus measures and restore consumer confidence, the country’s economy may gradually transition to a more balanced and resilient model. This approach will likely involve a mix of short-term policies—such as reducing interest rates and encouraging home purchases—and longer-term reforms designed to increase household wealth and income.
Experts agree that increasing consumer spending power will be a central component of China’s economic strategy moving forward. Potential measures to achieve this could include tax reductions for low- and middle-income households, incentives for homebuyers, and improved social welfare programs, particularly in education, healthcare, and pensions.
China’s economic trajectory is of global significance, given its integral role in international trade and supply chains. A prolonged period of deflation in China could have ripple effects across global markets, affecting commodity prices, trade volumes, and investor sentiment. For instance, as the world’s largest consumer of metals, a downturn in China’s economy could reduce global demand for resources, impacting exporters in countries like Australia and Brazil.
Furthermore, as China contends with a potential rise in trade tensions with the United States, the global economic landscape could be reshaped, with countries reconsidering trade policies and alliances. Economists are watching the upcoming U.S. election closely, as a shift in trade policy under a Trump administration could add another layer of complexity to China’s economic challenges.
