As 2023 approaches its final quarter, China’s economy faces a significant challenge. Persistent deflationary pressures are testing the resilience of its recovery efforts. The upcoming data, expected to be released on Thursday, will likely reveal a concerning trend. Economists predict a return to deflation for Chinese consumer prices in October. That marks a worrisome pattern that has been evident throughout the year.
Persistent Weakness in Consumer Prices
The struggle with deflation is not new for China this year. The consumer price index experienced a dip into deflationary territory as early as July, and since then, it has been wavering around the brink of negative year-on-year growth. Despite assurances from the People’s Bank of China in August that a rebound was on the horizon, the looming threat of another decline suggests that optimism may have been premature.
Analysts at Morgan Stanley have expressed concern that China may be on the cusp of a prolonged battle with falling prices. The nation’s economic model, historically fueled by extensive credit, is undergoing a pivotal transition. As Beijing navigates this shift, it finds itself at the initial stage of combating deflationary forces.
The weak inflation figures are not the only source of uncertainty for China’s economic prospects. Recent indicators, including an unexpected contraction in factory activity and deceleration in the services sector for October, have cast additional shadows over the nation’s growth outlook.
A Closer Look at China and Its Price Measures
Larry Hu of Macquarie Group Ltd. points out that China’s broadest price measure, the GDP deflator, will likely see negative figures in the year’s last quarter. This trend has not been observed since 2015, indicating a significant shift in the economic landscape.
In the coming days, several reports are expected to shed more light on the trajectory of China’s economic recovery. Among these, export figures for October are anticipated to show a narrowing decline. However, this is partially attributed to a lower comparative base from 2022 when China grappled with pandemic-related lockdowns.
Credit data for the past month may reveal an uptick in overall financing fueled by a surge in government bond issuance. This development has led to growing expectations that the central bank may step in with increased liquidity support, potentially through a cut in the reserve requirement ratio. Such a move could ease the pressure on interbank liquidity ahead of the central bank’s monthly policy loan operations in mid-November.
Mixed Economic Signals
Bloomberg Economics offers a cautious outlook, anticipating mixed signals from the forthcoming data. While credit growth may indicate the effectiveness of recent incentives to encourage borrowing, trade contraction is expected to lessen, albeit due to statistical base effects rather than a genuine resurgence in domestic or international demand. Consumer price inflation is projected to hover near zero, underscoring the ongoing deflationary concerns.
Amid these economic challenges, China’s premier has reaffirmed the nation’s commitment to market accessibility and import growth. Premier Li Qiang emphasized the country’s dedication to fostering an inclusive and mutually beneficial opening-up policy. There’s also a focus on an active effort to expand imports.