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China slips back into deflation in worrying sign

SHANGHAI – China slid back into deflation in October, highlighting the country’s struggle with shoring up growth through domestic demand.

Consumer prices fell 0.2 per cent after hovering near zero in the previous two months, the National Bureau of Statistics said on Thursday.

That compares with a 0.1 per cent drop forecast in a Bloomberg survey.

Producer prices fell for a 13th straight month, dropping 2.6 per cent versus an estimate for a 2 per cent decline.

Consumer costs have been stubbornly weak in 2023.

The consumer price index (CPI) slipped into deflation in July, and has been teetering on and off the edge of negative year-on-year growth.

While the People’s Bank of China said in August that prices would rebound from the summer rough patch, the latest data shows that assessment is overly optimistic.

Deflation weakens investor confidence as companies record income and profit in nominal terms, meaning it is not adjusted for inflation.

It increases their debt servicing pressure, a problem in a highly leveraged economy such as China’s.

It also hurts consumption, as consumers might delay purchases due to the expectation that prices will fall further in the future.

“Combating persistent disinflation amid weak demand remains a challenge for Chinese policymakers,” said Mr Bruce Pang, chief economist for Greater China at Jones Lang LaSalle. “An appropriate policy mix and more supportive measures are needed to prevent the economy from a downward drift in inflation expectations that could threaten business confidence and household spending.”

The offshore renminbi was little changed at 7.2854 per US dollar immediately after the data, kept within a tight range since Thursday’s open.

Chinese 10-year government bond yield held steady at 2.65 per cent.

China’s inflation rate has been low in 2023 due to domestic factors such as a housing slump and weak consumer confidence, and international factors including a fall in global commodity prices from 2022’s highs and weak demand for Chinese-made goods leading to falling exports.

Recent consumer price declines have been driven by large drops in the price of pork, which is the country’s most-consumed meat and so has a heavy weighting in China’s CPI.

Pork producers increased supply, betting on surging demand after the end of Covid-19 restrictions at the end of 2022. But the rebound fell short of expectations.

The weak CPI reading is mainly due to the slump in pork prices, said OCBC economist Tommy Xie.

Combined with the weak producer price index reading, this indicates persistently weak demand in China, he said.

There could be a silver lining.

“This could potentially be seen as positive news for global central banks battling inflation. It suggests that despite the recent recovery of the Chinese economy, there is no immediate threat of China exporting inflation,” Mr Xie added.

China is expected to record a 0.5 per cent CPI growth for full-year 2023, according to the median forecast of economists polled by Bloomberg.

That is well short of the government’s annual target of a rise of around 3 per cent.

Low inflation has been one of the main pieces of evidence cited by economists who argue that China’s economy is growing below its potential and needs more monetary and fiscal stimulus.

Beijing has stepped up monetary and fiscal easing in recent months, such as cutting interest rates and the amount of cash banks must keep in reserve, as well as issuing additional sovereign bonds.

Those efforts to support the economy have helped lift demand for raw materials over the past few months, but that has not necessarily fed through into prices. BLOOMBERG

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