China's Battle Against Deflation Continues: Yet Another Major Challenge
China faces a new challenge as it struggles to tackle deflationary pressures With falling prices this year, the country requires additional stimulus measures to counter this economic setback
Subscribe to CNN's Meanwhile in China newsletter to stay updated on the country's economic trends and their impact on the global stage. Despite efforts from central banks worldwide to combat inflation, China is facing the challenge of declining prices in the current year.
In November, the Consumer Price Index (CPI) fell by 0.5% compared to a year ago, representing the largest drop since November 2020. This decrease was more severe than anticipated, with analysts predicted only a 0.1% decrease in a Reuters poll. The acceleration from October, when the CPI fell by 0.2% from the previous year, has raised concerns and calls for immediate action from Beijing to stimulate demand and prevent a further decline in prices.
After policymakers pledged to enhance fiscal and monetary support to stimulate the struggling economy, the latest data has been released. This comes at a time when China has been grappling with sluggish prices, largely attributed to a decline in the property market and weakened consumer confidence throughout the year.
Consumer inflation has decreased since February and fell below zero in July for the first time in over two years. It rebounded in August, remained steady in September, but dropped back into negative territory in October.
According to a report from analysts at Citi, China's deflation situation is worsening due to a combination of factors including lower domestic food prices, adjustments in international oil prices, and reduced domestic demand.
"Signs of price weakness are now spreading from goods to services," they added.
A woman selects clothes at a shopping mall in Beijing on June 15, 2023.
Wang Zhao/AFP/Getty Images
The CPI was negatively impacted by a 4.2% decrease in food prices in November compared to the previous year, with pork prices dropping by 31.8%. Additionally, gasoline prices also fell following a dip in international oil prices during that month.
Service inflation decelerated, with a 1% increase from the previous year, compared to a 1.2% rise in October. The Producer Price Index (PPI), driven by commodity and raw material prices, fell 3% in November, marking the 14th consecutive monthly decline.
More stimulus needed
The worsening deflationary pressure has cast further doubt over Chinas economic recovery.
"The Citi analysts emphasized the urgency of avoiding a harmful cycle of deflation, eroding confidence, and decreased economic activity due to policy indecision."
"In Hong Kong last month, Pan Gongsheng, the governor of the Peoples Bank of China, announced that China would maintain an accommodating monetary policy to bolster the economy and anticipated an increase in consumer prices in the near future."
At a Politburo meeting on Friday, China's top officials committed to increasing domestic demand and boosting consumer spending. The meeting, along with the upcoming annual Central Economic Work Conference (CEWC), usually establishes economic policy for the year ahead.
Investors are eagerly anticipating more information from the CEWC regarding economic policy for the coming year. Citi analysts have stated that they anticipate "imminent" reductions to the reserve requirement ratio and policy rates.
