China deflation: Recovery falters, prices fall for first time since Feb 2021

Driven by weakened demand at home as well as abroad, the Chinese economy has fallen in deflation. China’s consumer price index dropped 0.3 per cent on year, the National Bureau of Statistics (NBS) said on Wednesday. It was the first year-on-year decline since February 2021. The producer price index (PPI) fell for the 10th consecutive month, down 4.4% from a year ago.

The country’s economic recovery witnessed a brisk start but slowed down after demand dried up. Although authorities have rolled out a string of policy measures to support the economy, more steps are expected to be rolled out. 

China's bluechip CSI300 index and the Shanghai Composite Index SSEC both declined after the figures.

China’s consumer prices moved to negative territory in February 2021 and have been on the brink of deflation for months. However, other large economies globally witnessed a trend of inflation, triggering central banks to rapidly raise interest rates. 

The statistics bureau stated that the average consumer price inflation over the year-to-date period was 0.5 per cent, as against the government’s target average inflation rate of 3 per cent.  

WHAT IS DEFLATION?

Unlike how general price levels in a country increase during inflation, in deflation these price levels decrease. It can be caused by an increase in productivity or a decrease in demand or volume of credit in the economy. 

In inflation, there is too much money and not enough goods, but in deflation there is a growing supply of goods and a slower-growing supply of money. When prices are adjusted downwards, it results in falling price levels. 

Deflation can be seen as a positive trend in most cases, as it gives greater purchasing power to the consumers and also enables greater savings. However, rapid deflation could also indicate short-term contraction of economic activity. 

CHINA’S ECONOMIC GROWTH

There have been mounting fears about China entering an era of slower economic growth. However, Liu Guoqiang, deputy governor of the central bank, said last month that there would be no deflationary risks in China in the second half of the year, but acknowledged that the country needs time to return to normal after the COVID-19 pandemic. 

The NBS said in a separate statement that the demand-supply relationship would recover and that CPI would rebound. 

While the government rolled out policy stimulus, the housing market remained weak, unemployment was high, and appetite among foreign firms to invest in China remained diminished, which in turn triggered concerns.

(With Reuters inputs)

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