Image Credits - Reuters
Prices in China are on the decline once more, following a two-month break. Despite state-controlled banks injecting money into the construction of additional factories, both households and businesses remain cautious about spending.
China’s price decline raises concerns about the potential onset of deflation—a challenging economic scenario. In deflation, companies and workers experience reduced income for their goods or services, while their existing debts maintain their weight.
In October, consumer prices in China saw a 0.2 percent decrease compared to the previous year, according to the National Bureau of Statistics. This drop was largely influenced by declining food prices, with a significant 30 percent fall in pork prices attributed to increased pig farming by Chinese producers.
Fluctuations in food prices can be sudden and don’t necessarily result in either deflation or inflation, which represent broader shifts in the overall price level of an economy. Excluding both food and energy prices—where gasoline saw a slight increase last month—consumer prices in October showed a 0.6 percent rise from the previous year, as reported by the statistical agency.
Gita Gopinath, the first deputy managing director of the International Monetary Fund, expressed optimism at a Beijing news conference on Tuesday, stating that she believes China can steer clear of deflation. She pointed out that while weak food and energy prices have contributed to a decline in overall inflation, these factors may not endure over the long term.
However, the decrease in food prices doesn’t account for the more extensive decline in wholesale prices imposed by factories and other producers in China. The country’s producer price index recorded a 2.6 percent drop in October compared to the same month last year. Remarkably, this index has been on a downward trend for 13 consecutive months on a year-on-year basis.
Despite consumer prices in China experiencing a slightly deeper decline than the anticipated 0.1 percent, stocks in Shanghai and Shenzhen saw an initial rise in Thursday’s trading. The stagnation in consumer prices in September, a 0.1 percent increase in August, and a 0.3 percent decrease in July highlight the ongoing economic challenges.
The dip in prices is indicative of weak demand and surplus supply across various goods. Given that apartments constitute a significant portion of Chinese households’ wealth, with existing home prices dropping nearly 18 percent on average since August 2021, people are understandably hesitant to spend money.
China’s stringent pandemic restrictions seem to have had a prolonged impact on both consumer and business spending, despite the sudden abandonment of these measures almost a year ago. The two-month COVID lockdown in Shanghai last spring significantly dented nationwide consumer confidence, surpassing the decline observed during the global financial crisis in 2008 and 2009.
Even after the lifting of COVID control measures, consumer confidence experienced only a modest recovery in the first three months of this year. However, recent data from the National Bureau of Statistics indicates that confidence levels have once again dropped to nearly the same lows as observed at the end of the Shanghai lockdown.