China: Consumer Prices Fall, Raising Deflation Concerns

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Facts

• On Wednesday, China's National Bureau of Statistics (NBS) announced that consumer prices fell in July for the first time in more than two years, highlighting a trend of deflation that affects household wealth and makes loan repayments more difficult.¹
• The NBS report shows that inflation fell 0.3% in July and comes a day after July figures showed that imports and exports fell sharply during the month. Manufacturers and retailers are now forced to cut prices to deal with a glut of supply and sluggish sales, as producer price inflation fell by 5.4%.²
• China's economy has struggled to rebound since the end of the country's zero-COVID policies, with Beijing lowering interest rates and offering tax benefits to businesses in a bid to raise demand, while stopping short of major economic stimulus.³
• Unlike other countries, China didn't disburse cash benefits to consumers during the pandemic, a policy which fueled consumer spending and inflation. As confidence in the economy remains low, coupled with a 21% youth unemployment rate, Chinese consumers are more likely to save than to spend their money.⁴
• China's GDP is expected to fall below forecasted growth this year, hampered by a struggling real estate market, as deflation makes it more onerous to repay debt. Pivoting from exports, Beijing has offered more public housing and subsidies for electric cars to spur domestic consumption.⁵
• The deflation could lower costs for Chinese exports to other economies, with the cost of potentially depressing foreign manufacturing. Economists predict Beijing will take stronger stimulus measures, such as tax and interest rate cuts.⁶

Sources: ¹New York Times, ²Guardian, ³Ft, ⁴Wall Street Journal, ⁵Dw.com and ⁶BBC News.

Narratives

• Anti-China narrative, as provided by Foreign Affairs. China's powerhouse economy could finally be faltering, as its economic strength may be weaker than previously portrayed. After hedging their bets on a post-COVID boom that never materialized, Beijing will strain under a mountain of debt, lower demand, and a property crisis. The government has started to muzzle economists who don't toe the party line of economic success, as China attempts to maintain their façade of unmitigated growth.
• Pro-China narrative, as provided by Xinhua. China continues on a trajectory of growth, as demand for services continue to rise as pandemic recovery continues apace, even amid a faltering demand for goods. The 20-point plan unveiled by the government to shore up consumer demand is a testament to China's sober-minded thinking on the economy, as economic growth continues unabated. Reports of China's economic demise are, once again, greatly exaggerated.

Predictions