In recent weeks, China’s economy has exhibited indications of stabilization, with manufacturing activity increasing and export reductions slowing. However, there is still anxiety about the recovery, hampered by a property crisis and dwindling sentiment. China’s consumer inflation rate unexpectedly fell in September, while factory-gate deflation remained, indicating that the economy’s growth path remains weak and needs extra support. According to the National Bureau of Statistics, the consumer price index was unchanged from a year ago last month, falling short of forecasts for a modest gain and creeping closer to the deflationary level reached in July. The core CPI, which excludes volatile food and energy costs, climbed 0.8% in September, the same as in August. Producer prices declined 2.5%, somewhat less than last month’s drop.
“September inflation data came out below consensus, suggesting a long way to go for the PBOC’s fight against deflation,” said Zhaopeng Xing, senior China strategist at Australia & New Zealand Banking Group Ltd., referring to the central bank. “The government has announced hundreds of counter-cyclical measures to boost domestic demand. But consumer confidence remains weak.”
CPI inflation at zero indicates the deflationary pressure in China is still a real risk to the economy
In recent weeks, China’s economy has exhibited indications of stabilization, with manufacturing activity increasing and export reductions slowing. However, there is still anxiety about the recovery, hampered by a property crisis and dwindling sentiment. Chinese consumers traveled and spent less than the government had planned during the recent Golden Week holiday season, while lackluster home sales raised questions about whether further help may be required to boost development. The Hang Seng China Enterprises Index fell as much as 1.9% in early trade on Friday, putting an end to a six-day winning streak. The onshore benchmark CSI 300 Index of stocks dropped roughly 1% as well.
Golden Week may have accounted for slower growth in food prices, according to Dong Lijuan, chief statistician with the NBS, who in a statement attributed the softer rate to ample food supply before the holiday. She also cited a high base of comparison with last year as a reason for the flat CPI. “CPI inflation at zero indicates the deflationary pressure in China is still a real risk to the economy,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management. “The recovery of domestic demand is not strong, without a significant boost from fiscal support.”
More data on the status of the economy in the third quarter will be released next week
Bloomberg News reported earlier this week that the government is considering increasing the fiscal deficit for the year as part of a strategy to spend more on infrastructure — a type of stimulus to assist the economy in attaining an official growth target of approximately 5%. Economists also expect authorities to consider other measures, such as another rate cut, before the end of 2023. That may not happen for another month or two: Analysts predict the People’s Bank of China to keep its one-year medium-term lending facility rate unchanged on Monday. Depending on the Federal Reserve’s future decisions, monetary policy space may be limited. Consumer prices in the United States rose at a rapid pace in September, confirming the Federal Reserve’s intention to leave interest rates unchanged.
The International Monetary Fund recently reduced China’s growth prediction for this year to 5% from 5.2%, and for next year to 4.2% from 4.5%. According to the Fund, the economy is losing speed due to reductions in real estate investment and home prices, which threaten government revenue from land sales, as well as weak consumer mood. More data on the status of the economy in the third quarter will be released next week, including GDP figures and indications on retail sales, industrial output, and unemployment.