Beijing, China – China’s consumer prices fell more than expected in October, dropping the country back into deflationary territory and raising concerns about the health of the world’s second largest economy.
The National Bureau of Statistics (NBS) reported on Thursday that the consumer price index (CPI) edged down 0.2% in October compared to a year earlier. The decline exceeded the 0.1% fall predicted by analysts in a Reuters poll.
The drop was mainly driven by plunging food prices, especially pork, which has declined 30% versus last October according to Goldman Sachs. Pork is China’s most consumed meat and holds significant weight in the CPI basket.
Excluding volatile food and energy categories, core inflation sank even further in October, decreasing 0.6% from a year ago. Economists view the weak core figure as indicative of soft consumer demand across the board.
“The data adds to evidence of renewed economic weakness,” said Capital Economics in a research note on Thursday.
Deflation Fears Overblown Say Some Analysts
Some analysts downplayed concerns that China is experiencing pernicious deflation. Robert Carnell, regional head of research at ING, argued the current situation is not comparable to genuine deflationary episodes where consumer prices, assets, and wages all decline in unison, choking off economic activity.
“What China has right now is a low rate of underlying inflation, reflecting weak domestic demand,” Carnell wrote on Thursday.
China briefly experienced consumer price deflation of -0.3% in July before recovering to positive territory in August.
Nevertheless, the return of declining consumer prices will likely put pressure on the government and central bank to continue providing substantial stimulus and monetary support to bolster the uneven economic recovery.
Housing Market, COVID Remain Economic Headwinds
China’s economy is facing stiff headwinds from multiple fronts, including a property sector meltdown and disruptive COVID-19 controls and lockdowns.
The ailing housing market remains in a protracted slump as buyer sentiment stays depressed. Problems first surfaced last year when major developer Evergrande defaulted on its enormous debts, sparking contagion across the real estate sector.
Housing sales by value plunged 28.6% in September according to NBS. Property investment has also dropped, contracting 8.8% in the first nine months of 2022 versus the same period last year.
China’s stringent zero-COVID policy has been another drag on growth. While most of the world has opened up, China continues relying on strict lockdowns, mass testing, and mandatory quarantines to eliminate outbreaks, taking a heavy toll on its economy.
Shanghai endured a harsh two-month lockdown earlier this year, confining 25 million residents to their homes. The resulting disruption sent shockwaves through global supply chains given the city’s prominence as a shipping and manufacturing hub.
This month, a spike in cases forced authorities to seal off sections of major cities like Beijing, Guangzhou, and Zhengzhou. Apple warned this week that COVID curbs have “temporarily impacted” production at its massive iPhone factory in Zhengzhou.
Lackluster Sentiment Evident in Singles Day Sales
Anemic sentiment among Chinese consumers and businesses is apparent in the muted early results for Singles Day, the country’s massive annual online shopping festival.
Singles Day promotions at e-commerce leaders like Alibaba and JD.com officially kick off on November 11. However, sales have been underwhelming so far during the pre-event period compared to last year’s levels.
To spur spending, retailers have offered unusually generous discounts and vouchers of up to 90% off. But the weak festive buying indicates Chinese shoppers are tightening their belts amid the uncertain economic environment.
Meanwhile, China’s producers are also under pressure from softening demand and falling prices. The producer price index (PPI), measuring wholesale and factory gate prices, declined 2.6% in October versus a year prior.
“This will likely keep policymakers on guard to keep support coming through,” said HSBC’s Erin Xin.
Stimulus Ramps Up To Boost Economy
With economic conditions deteriorating, China’s government and central bank have stepped up efforts in recent months to prop up growth through increased spending and monetary stimulus.
The People’s Bank of China (PBOC) has cut interest rates along with banks’ reserve requirement ratios to boost lending. The government has also accelerated infrastructure investments and used fiscal policy tools like tax breaks and financial subsidies to aid consumers and businesses.
China’s top leaders recently signaled they would stick with an expansionary pro-growth policy stance. At October’s Communist Party Congress, President Xi Jinping avoided mentioning the real estate crisis or zero-COVID.
Analysts believe more significant stimulus like deeper rate cuts may be on the horizon if China’s economy continues to lose steam. However, some economists caution that excessive easing could exacerbate the country’s dangerous debt levels.
“Policymakers are walking a tight line between providing just enough support while avoiding adding to already high financial risk,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management. “I expect high-frequency activity data to remain weak in the remainder of 2022 as the property sector continues declining.”
Beyond stabilization measures, many experts say structural reforms are needed to bolster China’s long-term growth trajectory by improving productivity and birth rates.
“Policy support cannot replace productivity as the ultimate driver of growth,” said Louis Kuijs of Oxford Economics. “Longer-term growth will depend on Beijing’s ability to deliver market-oriented structural reform.”
With consumer and producer prices pointing to persistent economic challenges, all eyes will remain on Chinese authorities to see if they ramp up stimulus efforts in coming months should conditions deteriorate further.