China is teetering on the brink of deflation as the world's second-largest economy continues to feel the impact of Beijing's draconian zero-Covid policy.< /p>
Consumer price inflation (CPI) fell to zero in the year to June after a sharp fall in pork prices.
The official figure was the weakest since February 2021 and below economists. ' estimates CPI growth of 0.2% annually.
Factory prices are also declining, indicating that consumer prices may change soon. Producer prices fell 5.4% in June, the ninth straight monthly drop and the sharpest drop since the end of 2015.
Analysts at Goldman Sachs believe that China is more likely to slide into deflation as prices fall rather than rise as early as this month.
1107 Chinese deflation
The temporary period of deflation is good news for households as it raises purchasing power of consumers and helps lower interest rates.
However, extended periods of falling prices can drag the economy into a low-growth trap, with wages stagnating and companies forced to cut jobs to deal with stagnant demand.
Japan, the world's third-largest economy, has struggled for decades with deflation.
Fears that China may suffer the same fate hit oil prices. A barrel of Brent oil fell to $76.52 in early trading, down about 1 percent.
Deflation is looming in China as the world's second-largest economy struggles to recover from a draconian zero-Covid policy that was just lifted. at the end of last year.
Increasing tensions between Beijing and Washington have also weighed on activity, as Western companies are increasingly withdrawing investment from China.
Youth unemployment in the country is 20. 8% and cautious families save money instead of spending.
Household deposits have doubled to about 13 trillion pounds (130 trillion yuan) since the pandemic, according to official statistics, and many are using their cash surplus to pay off mortgages and other debts.
1107 China Uncertainty
Duncan Wrigley, Chief China economist at Pantheon Macroeconomics, said: “Weak consumer inflation is a sign of a sluggish recovery in consumer spending, especially on goods, as well as overcapacity.”
Several Chinese internet giants reported disappointing sales data at a major trade event earlier this month, dashing hopes of a recovery in demand following the lifting of Covid-related restrictions.
Low inflation and sluggish growth mean analysts are now doubt it. Beijing will achieve its economic growth target of “about 5%” by 2023. The economy grew just 3% in 2022, one of the weakest paces in the country's modern history.
Economists expect the People's Bank of China (PBOC) to respond to the country's tepid outlook by cutting interest rates to stimulate demand.
Analysts at Barclays said in a client note: “We believe a more difficult deflationary environment and a sharp slowdown in growth confirms our view that the NBK has entered a rate-cutting cycle.”
Last month, the central bank cut a number of key interest rates by lowering the base rate on an annual loan. (LPR) for the first time in 10 months by 0.1 p.p. up to 3.55%.
The five-year rate, closely linked to mortgage deals offered by commercial banks, was reduced by the same amount to 4.2%. the bank may take further action in an attempt to stimulate growth and spending. The one- and five-year rates have not been cut at the same time since August 2022.
Some economists believe Beijing will have to complement the rate cuts with tax cuts or spending increases to spur activity.
Still , Mr. Wrigley said that Beijing is unlikely to undertake massive fiscal stimulus.
He said: “So far, public information points to targeted, limited stimulus, which will mainly be aimed at supporting the industry. , technology upgrades and private firms rather than a big handout for consumers.”
On Monday, politicians announced more bailouts for the country's ailing real estate sector to counter heightened worries about unsustainable debt.
Companies will be offered loan extensions to help cash-strapped developers cope with the downturn in demand.
1107 Tourism China
The looming deflation in China contrasts sharply with the ongoing outbreaks of inflation seen elsewhere in the world. .
UK inflation hit 8.7% in May, forcing the Bank of England to continue its most aggressive round of rate hikes in decades.
Unlike many Western countries, China does not start massive increases in government spending during the pandemic.
Despite the fact that the People's Bank of China lowered interest rates during the quarantine, it did not engage in large-scale money printing. The over-stimulation of the pandemic has been blamed for fueling inflation elsewhere in the world.
Unsustainable economic growth in China threatens to hold back the recovery in other emerging markets, especially Thailand and Hong Kong, which are heavily dependent on Chinese visitors.
About a million people visited Thailand from China in the first five months after President Xi Jinping finally reopened China's borders.
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