Deepening deflation has tightened its grip on the entire Chinese economy, underscoring the urgency behind the Chinese Communist Party and President Xi Jinping’s recent emphasis on increasing government “fiscal stimulus.”
China’s National Bureau of Statistics reported over the weekend that consumer prices fell by 0.5% in November, with an annual rate also at 0.5%. This decline was notably steeper than October’s 0.2% contraction and worse than the anticipated 0.1% decrease.
November’s deflation was the most severe since the depths of the pandemic in November 2020, signaling that weakening demand from both domestic and export markets is putting pressure on the Chinese economy. This has forced companies, large and small, to reduce their prices.
Additionally, producer price deflation deepened in November, reaching an annual rate of 3.0%, the sharpest contraction since mid-year. This was considerably higher than October’s 2.6% decline and the market’s expected 2.8% fall.
While consumer prices in the world’s second-largest economy have flirted with deflation for several months, China’s central bank Governor Pan Gongsheng stated last week that inflation was anticipated to rise. However, recent data contradicts this assertion, suggesting that the central bank and the government are in denial.
China has been grappling with multiple challenges since emerging from its strict 2022 Covid lockdowns at the beginning of 2023. The most pressing issue is the property sector crisis and its connections to mounting local government debt and unstable “shadow banks.” Weak demand, both domestically and internationally, has led consumers to be cautious amidst an uncertain economic recovery.
Surprisingly, demand for key commodities such as thermal coal, copper, and iron ore remains robust, creating a puzzling paradox.
Moody’s issued a credit rating downgrade warning for China, citing the costs of bailing out local governments and state-owned enterprises and addressing the property crisis as factors that would weigh on the economy. The government was displeased that the deflation news confirmed the stagnant state of much of the economy.
Recent reports suggest that the government intends to boost domestic demand and accelerate economic recovery in 2024. State media quoted the Communist Party’s Politburo as making this promise, and markets are eagerly anticipating more government stimulus during the upcoming “Central Economic Work Conference” later this month.
Xinhua news agency reported that the Politburo plans to continue implementing “proactive” fiscal policies and “prudent” monetary policies in the coming year to bolster domestic demand. Led by Chinese President Xi Jinping, the Politburo’s recent meeting analyzed the economic tasks for 2024 and pledged to enhance “economic vitality,” mitigate risks, and solidify the upward trend in the world’s second-largest economy.
China’s Politburo emphasized that “proactive fiscal policy must be moderately strengthened, improve quality and efficiency, and the prudent monetary policy must be flexible, appropriate, precise, and effective.” Notably, there was no mention of the deflation issue, perhaps indicating that the relevant data was unavailable.
State media also quoted President Xi as warning in a Beijing speech earlier in the week that China’s economic recovery remains at a “critical stage,” acknowledging the complexity of the economic situation.
If statements, speeches, and media reports could stimulate economic recovery, China would have no issues, given the volume of rhetoric and promises that have often fallen short of expectations.