By Emmanuel Nduka
The economy of China has slipped into deflation as consumer prices declined in July for the first time in more than two years.
This is according to the official consumer price index, which indicated that inflation fell by 0.3% last month from a year earlier.
While analysts have said this increases pressure on the Chinese government to revive demand in the world’s second largest economy, the development follows weak import and export data, which raised questions about the pace of China’s post-pandemic recovery.
China is also tackling ballooning local government debt and challenges in the housing market. Youth unemployment, which is at a record high, is also being closely watched as a record 11.58 million university graduates are expected to enter the Chinese job market this year.
Falling prices make it harder for China to lower its debt – and all the challenges which stem from that, such as a slower rate of growth, analysts said.
“There is no secret sauce that could be applied to lift inflation,” says Daniel Murray from investment firm EFG Asset Management. He suggests a “simple mix of more government spending and lower taxes alongside easier monetary policy”.
Prices Fell After COVID
While most developed countries saw a boom in consumer spending after the COVID-19 pandemic restrictions ended, China’s cases differed. People who had saved money were suddenly able and willing to spend, while businesses struggled to keep up with the demand.
The huge increase in demand for goods that were limited in supply – coupled with rising energy costs after Russia’s invasion of Ukraine – inflated prices.
In China, where prices did not soar as the economy emerged from the world’s tightest coronavirus rules, consumer prices last fell in February 2021. The prices charged by China’s manufacturers – known as factory gate prices – have also been falling.
“It is worrisome as far as it shows that demand in China is poor while the rest of the world is awakening, especially the West. Deflation will not help China. Debt will become heavier. All of this is not good news,” Alicia Garcia-Herrero, an adjunct professor at the Hong Kong University of Science and Technology, said.
China’s economy is already facing other hurdles. For one, it is recovering from the impact of the pandemic at a rate that is slower than expected.
Official figures released on Tuesday showed that China’s exports fell by 14.5% in July compared with a year earlier, while imports dropped 12.4%. The grim trade data reinforces concerns that the country’s economic growth could slow further this year.
China is also dealing with an ongoing property market crisis after the near-collapse of its biggest real estate developer Evergrande.
Even as the Chinese government has been sending the message that everything is under control, but has so far avoided any major measures to encourage economic growth, building confidence among investors and consumers will be key to China’s recovery.
