9 september 2024 : China’s core inflation has slowed to its lowest rate in over three years, highlighting growing economic weakness and increasing pressure on the government’s annual growth target. In August, the consumer price index rose by just 0.6% year-on-year, falling short of the 0.7% growth predicted by economists. Core CPI, excluding food and energy, increased by only 0.3%, the smallest gain since March 2021, signaling persistent overall demand weakness.
Michelle Lam, a Greater China economist at Societe Generale, warns that China’s deflationary pressures are deepening and could lead to a downward spiral in prices and wages, requiring more drastic policy measures.
Factory-gate prices remain in decline, with the producer price index dropping 1.8% from the previous year, exceeding economists’ expectations of a 1.5% decrease. The slight rise in consumer prices was largely due to increased food costs caused by adverse weather, particularly the 18.1% rise in fresh vegetable prices due to heavy rainfall.
China is experiencing its longest period of falling consumer prices since 1999. Weak consumer and investment demand are leading to intense price competition in sectors like electric vehicles and solar energy, jeopardizing the country’s 5% growth target as consumers postpone purchases and businesses cut wages.
Zhiwei Zhang, chief economist at Pinpoint Asset Management, calls for a more proactive fiscal policy to prevent deflationary expectations from taking hold. Despite various policy measures, including cash-for-clunkers programs and rate cuts, they have been insufficient to counteract the housing market slump and low consumer confidence.
Former central bank Governor Yi Gang has emphasized the need for immediate action against deflationary pressures. While he hopes for a positive GDP deflator in the coming quarters, Goldman Sachs’ Chief China Economist Hui Shan finds this challenging due to weak sentiment and uncertainty.
The People’s Bank of China still has room to lower the reserve requirement ratio for banks, which Zou Lan, the central bank’s monetary policy department head, noted is currently around 7%. Analysts anticipate further rate cuts and reductions in the RRR, with September potentially being a key period for these adjustments.