Business Maverick

Business Maverick

China consumer prices stall with industry stuck in deflation

China consumer prices stall with industry stuck in deflation
Shoppers at a shopping mall in Pudong's Lujiazui Financial District in Shanghai, China, on Saturday, 5 August 2023. (Photo: Qilai Shen/Bloomberg)

China’s consumer prices barely increased from a year earlier last month and industrial prices continued to slump, underscoring the deflationary pressures that remain a key threat to the economy’s recovery. 

The consumer price index rose 0.1% in March from the prior year, the National Bureau of Statistics reported on Thursday. The median forecast of economists in a Bloomberg survey was a 0.4% gain. The inflation rate dropped from 0.7% in February, when it had climbed above zero for the first time in six months during the Lunar New Year holiday.

Producer prices fell 2.8% from a year earlier in March, extending a falling streak for the 18th straight month, the longest since 2016. Chinese government bonds were little-changed after the numbers, while stocks fell. 

The figures suggest Chinese consumers are struggling to maintain any momentum picked up during the holiday season, as the country’s real estate slump persists and the job market remains weak. That may dampen optimism — sparked by buoyant exports and factory activity data released in recent weeks — about China’s ability to hit its growth target of around 5% this year.

“The price data clearly mirrors the weak domestic demand,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. “The recent improvement in momentum is primarily export driven.”

Chinese 10-year government bonds didn’t shift much on the data, trading around 2.29%. Onshore stocks declined, on track for a sixth day of losses, while a gauge of Chinese stocks listed in Hong Kong also slid as higher-than-expected US inflation data supported the view the Federal Reserve may keep interest rates higher for longer.

“CPI inflation surprised on the upside in the US and downside in China,” said Zhiwei Zhang, president of Pinpoint Asset Management. “This indicates the monetary policy stances in these two countries may continue to diverge.”

Fading inflation may also ramp up pressure on China’s government to offer more support for the economy. Falling prices squeeze companies’ profit margins, discouraging them from investment, and there’s a risk consumers could become even more reluctant to spend in anticipation that goods will be cheaper in the future. 

Chinese legislators acknowledge that weak demand is a problem, and have lined up steps to counter it — including a plan to subsidise households and businesses that want to upgrade appliances or machines — though they’ve held back from large-scale stimulus. 

In a sign that deflation could continue to haunt the economy in the coming months, price competition in some industries has intensified lately. Companies that produce materials for construction, like zinc smelters, have been forced to lower their charges because of excess capacity while electric-car producers are offering aggressive discounts to lure customers.

Core inflation, which strips out volatile food and energy prices, slowed to 0.6% last month from 1.2% in February, according to the NBS.

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