China slid into deflation in July, adding pressure on policymakers to step up monetary and fiscal support even as signs that the decline in prices is temporary may limit any stimulus.
The consumer price index dropped 0.3% last month from a year earlier, the National Bureau of Statistics said Wednesday, marking its first decline since February 2021. Economists surveyed by Bloomberg had predicted a 0.4% decline in prices.
Producer prices fell for a 10th consecutive month, contracting 4.4% in July from a year earlier, slightly worse than expected. It’s the first time since November 2020 that both consumer and producer prices registered contractions.
The statistics bureau attributed the decline in consumers prices to the high base of comparison with last year, saying the contraction is likely to be temporary and consumer demand continued to improve in July.
“With the impact of a high base from last year gradually fading, the CPI is likely to rebound gradually,” Dong Lijuan, chief statistician at the NBS, said in rare additional comments to accompany the official data. Chinese authorities have recently sought to prevent economists from discussing deflation in a bid to promote positive narratives about the economy.
China is experiencing a rare period of falling prices as consumer and business demand weakens after an initial burst in the first quarter following the ending of pandemic restrictions. A prolonged property market slump, plunging demand for exports and subdued consumer spending are weighing on the economy’s recovery.
“China is in deflation for sure,” Robin Xing, chief China economist at Morgan Stanley, said in an interview with Bloomberg TV. “The question is how long. It’s up to the policymakers — will they react with coordinated fiscal and monetary easing.”
More Stimulus
The Hang Seng China Enterprises Index trimmed earlier losses of as much as 0.9% to trade 0.2% lower as of 11:35 a.m. local time. The onshore benchmark CSI 300 Index of stocks also fell slightly by the mid-day break. The yuan traded offshore gained 0.2% to reach 7.2212 per dollar.
Investors are betting the weak inflation data will prompt the People’s Bank of China to add more monetary stimulus, like cutting interest rates. However, the central bank is facing several constraints that’s making it cautious, such as a weaker yuan and elevated debt levels in the economy. Fiscal support has also been moderate, given the financial pressures many local governments are facing.
“They need to accelerate all the government spending, raising government debt and do coordinated monetary and fiscal easing, to break this debt deflation trap,” Xing said.
Another thing holding authorities back from further policy loosening: Fears about whether the money released into the banking system by the PBOC would be stuck there, rather than used to fund productive activity.
“Some companies are reluctant to expand production” as their expectations about profit soften, the Economic Daily wrote in a front-page article on Wednesday. The newspaper is affiliated with with the State Council, China’s cabinet.
That weak demand for financing among those firms “drove them to put loans obtained immediately into deposits,” according to the article. “Liquidity is flush in the financial system.”
Beijing has tried to downplay the risk of deflation in the economy with some Chinese-based analysts saying they were instructed by regulators and their companies not to discuss the matter publicly. PBOC officials said last week that China will avoid deflation in the second half of the year, with consumer-price growth likely to trend closer to 1% by the end of the year.
Falling prices also suggest real financing costs in the economy are going up, which some economists argue should add to the urgency for the PBOC to take action to prevent growth momentum from weakening further.
“CPI and PPI both dropping into negative territory in the short term has in fact lifted real interest rates,” Bruce Pang, head of research and chief economist for greater China at Jones Lang LaSalle Inc.
“There’s a greater necessity to cut the RRR than interest rates in the short term, as there’s still room for various structural monetary policy tools and policy bank financing tools,” he said, referring to the amount of cash banks are required to keep in reserve.
Food Prices
The core inflation measure, which excludes volatile food and energy costs, picked up to 0.8% from 0.4%, a sign of underlying — although subdued — demand in the economy. A breakdown of the consumer inflation figures showed prices for household goods, food and transport contracted, while prices of services spending, like recreation and education, climbed.
“We expect CPI will be negative only for the short term, like for one to two months,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. “Food and energy prices are more likely to go up instead of going down in the second half of the year. That means the drag on CPI seen in the first half from food and fuel will like ease.”
While PPI has likely bottomed out, “it will be rather hard to emerge from deflation in the rest of the year,” he said.
—With assistance from Zhu Lin and Wenjin Lv.
Contact us at letters@time.com.
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