China’s Consumer Prices Fall for Third Consecutive Month in December
China’s consumer prices fell for the third consecutive month in December 2023, highlighting the challenges the Chinese government faces in revitalizing the economy amid continued deflationary pressures.
At the same time, China’s factory price index for industrial products fell for the 15th consecutive month. This growing concern among U.S. and European officials, as some Chinese business owners seek to export more low-cost goods to the rest of the world to compete with Western brands.
Chinese leaders have struggled for months to revive domestic demand after hopes of a rebound in economic activity after coronavirus containment measures were lifted. However, Chinese consumers are worried about a weakening domestic real estate market and high youth unemployment, leading them to cut back on spending. Facing even weaker domestic sales, factories and companies are competing to cut prices.
All of this is creating a tricky situation for the rest of the world. Until recently, Western economists were largely happy to see deflation in China because it lowered the cost of importing goods from the world‘s factory and helped bring down U.S. inflation, which had been cooling for most of 2023, but rose slightly in December.
But the forces driving deflation in China are leading to growing trade tensions, as the consequence of weaker domestic demand is more excess Chinese goods being diverted abroad. The EU last fall accused China of dumping cheap electric cars on the EU market and launched an investigation into the role of Chinese state subsidies.
Adam Wolfe, an emerging markets economist at Absolute Strategy Research, said: “Continued deflation or very low inflation in China could lead to a larger trade surplus and more trade frictions with the rest of the world.”
China’s central bank signaled last year that it believed domestic deflation was temporary. Despite repeated calls from economists for more aggressive measures to stimulate economic growth and consumer demand, Chinese policymakers have refrained from handing out cash to households or providing other forms of direct support.
Friday’s data provided at least some support for the Chinese government’s stance. China’s National Bureau of Statistics announced on Friday that CPI fell 0.3% year-on-year in December last year, narrowing from the 0.5% drop in November and lower than the 0.4% expected by economists surveyed by The Wall Street Journal. The decline in CPI in December was mainly dragged down by oil and food prices.
Excluding volatile energy and food prices, core CPI rose 0.6% in December.
But many economists say they believe deflationary pressures will be difficult to reverse.
Yao Wei, chief Asia economist at Societe Generale, predicts that although China’s CPI growth may rebound to 1% by the end of 2024, the downward pressure on prices will not ease quickly.
She said that in the bank’s view, China’s deflationary pressure caused by weak domestic demand may continue for a long time.
China’s consumer inflation rate for 2023 is 0.2%, well below the Chinese government’s target of about 3%, a sharp departure from some predictions a year ago, when they expected China’s top leaders to lift COVID-19 prevention measures by the end of 2022. Inflation will rise sharply later.
The producer price index (PPI), which measures factory prices for industrial products, fell 2.7% year-on-year in December, narrowing from the 3% decline in November. Since October 2022, the index has been in negative territory for 15 consecutive months.
Data from China’s National Bureau of Statistics showed that falling oil prices and lack of demand for some industrial products have weighed on producer prices.
Some economists worry that China could fall into a debt-deflation spiral, in which lower prices prompt companies to cut wages and consumers to hold off on spending, creating a vicious cycle of weaker demand and lower prices. Japan experienced a similar situation starting in the 1990s, when the country entered a decades-long period of economic stagnation, a shrinking population, and rising debt levels.
Measures taken by the Chinese government last year have had little effect so far.
China’s central bank has lowered interest rates several times. The government also lowered mortgage costs for households and expanded tax breaks for private business owners. China issued $137 billion in additional sovereign debt last October to fund infrastructure projects.
Despite these measures, recent data suggest that China’s economic growth has lost momentum after accelerating in the third quarter of last year. Surveys showed that manufacturing and services activity shrank, and new home sales remain weak. China’s real estate market continues to be turbulent after Zhongzhi Enterprise Group, one of the country’s largest trust companies, declared bankruptcy last week.
Forecasts from many investment banks around the world show that China’s economic growth rate in 2024 is expected to be 4%-4.9%. While this is a high figure by global standards, it represents a slowdown compared to earlier years during China’s economic boom.
Many economists expect the Chinese government to maintain a slightly higher growth target of around 5%, which may mean more stimulus measures are on the way.
Some economists expect deflationary pressures to ease this year as pork and oil prices rebound. Economists at JP Morgan noted that deflation in China is expected to end, but low inflation will persist. Citi economists said in a note to clients last month that China may start lowering policy interest rates starting in the second quarter of this year due to concerns about deflation.
“There is no time for policy indecision to prevent a possible vicious cycle between deflation, confidence, and economic activity,” they wrote.