China Deflation Risk Grows as Signs of Economic Weakness Mount

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(Bloomberg) — China’s core inflation slowed to its lowest in more than three years, adding to signs that policymakers are struggling to stimulate household spending and putting further pressure on the annual growth target.

The consumer price index rose 0.6% in August from a year earlier, below the median forecast for 0.7% growth in a Bloomberg survey of economists. Excluding volatile food and energy costs, the core CPI rose 0.3%, the lowest since March 2021, suggesting continued weakness in overall demand.

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“Deflationary pressures in China are becoming more entrenched,” said Michelle Lam, Greater China economist at Societe Generale. “This could fuel a downward spiral of prices and wages, which requires a more aggressive policy response.”

Factory prices remained stuck in deflation, as they have been since late 2022, with the producer price index sliding 1.8% from a year earlier, beating economists’ expectations for a 1.5% decline.

The modest rise in consumer prices was driven by higher food costs due to bad weather, said Dong Lijuan, a senior statistician at the National Bureau of Statistics, in a statement accompanying the release. Fresh vegetables in particular saw prices rise 18.1 percent due to heavy rainfall.

China is facing its longest streak of falling consumer prices since 1999, according to an economy-wide gauge of prices. Weak consumption and investment demand have led to intense price wars in sectors including electric cars and solar energy. That’s hurting China’s chances of meeting its growth target of around 5 percent, as consumers delay purchases and companies cut wages.

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“The fiscal policy stance needs to become more proactive in order to prevent deflationary expectations from becoming entrenched,” said Chui Zhang, chief economist at Pinpoint Asset Management.

What does the Bloomberg Economics report say?

The data suggest that policy steps to support the economy—from cash-for-clunkers to interest-rate cuts—have not been enough to offset pressures from the deteriorating housing market and falling confidence. We expect policymakers to step up their support.

David Coe, Economist

Read the full memo here.

BEIJING – Former central bank governor Yi Gang has called on policymakers to focus on combating deflationary pressures “right now,” a rare acknowledgement by a prominent Chinese figure of the country’s battle with falling prices.

“Overall, we have a problem of weak domestic demand, especially on the consumption and investment side, so this requires proactive fiscal policy and accommodative monetary policy,” Yi said at the Bund summit in Shanghai on Friday.

Yi said he hoped the GDP deflator, a broad gauge of prices, would turn positive in the next few quarters. But Hui Shan, chief China economist at Goldman Sachs, said that would be a “challenge” due to weak sentiment and lack of confidence in the future.

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“Organic private demand seems to be weakening more than we would like to see, but at the same time policymakers are feeling uneasy,” she said in an interview with Bloomberg Television.

The People’s Bank of China still has room to cut the amount of cash banks must hold in reserve, according to Zhou Lan, head of the central bank’s monetary policy department, who noted last week that the average reserve requirement ratio for financial institutions is around 7%.

Analysts expected further rate cuts and a reduction in the reserve requirement ratio, with September seen as a possible window for that.

(Updates with more details and context. Previous version corrected Zou Lan’s comments.)

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