China’s July consumer price inflation turned negative for the first time in two years and five months. Amid sluggish global demand and domestic demand, critics say that China has virtually fallen into deflation. The National Bureau of Statistics of China announced on the 9th that the consumer price index ( CPI
) in July fell 0.3% compared to the same period last year. It is the first time since February 2021 ( -0.2 %), during the COVID-19 pandemic, that the CPI recorded a negative year-on-year . The producer price index ( PPI ) , a leading indicator of the CPI , fell 4.4% year-on-year, continuing its downward trend for 10 consecutive months. The decline was larger안전놀이터 than Reuters’ estimate ( -4.1 %). It is the first time since November 2020 that the CPI and PPI both went negative at the same time.
In China, with various economic indicators deteriorating recently, the possibility of a prolonged downward trend in prices is raised. This is because, unlike the temporary price drop caused by the drop in pork prices at the end of 2020 and early 2021, the current price decline was caused by a combination of slowing global demand and sluggish domestic demand . It is evaluated that the fiscal expansion policy has limits as local governments are sitting in a pile of debt. Bloomberg News analyzed that the simultaneous decline in CPI and PPI is a sign of deflation.
Robin Xing, an economist in charge of China at US investment bank Morgan Stanley, said, “China has definitely fallen into deflation. Now is the time to see how long deflation will last.”
Earlier this year, the Chinese economy was expected to serve as a “growth engine” for the global economy. Unlike the United States, which is implementing an intense austerity policy, in China, the People’s Bank of China continues its monetary easing policy, and the ‘zero corona’ policy ended at the end of last year. It was generally expected by experts that the Chinese economy would show strong growth as the demand that had been suppressed during the zero corona period erupted.
But this expectation was misplaced. China’s economic growth rate in the second quarter of this year was 6.3% year-on-year, higher than the first quarter (4.5%), but it was a ‘shock’ that fell far short of the market forecast (7.1%). As the growth rate fell short of expectations and the July consumer price index announced on the 9th turned negative for the first time in two years and five months, there are voices of concern that the Chinese economy may be mired in Japanese-style deflation.
It is pointed out that the Chinese economy could fall into a vicious circle in which consumption shrinks due to the negative asset effect caused by falling real estate prices, which reduces corporate investment and, in turn, reduces jobs.
The fact that Chinese companies are competitively lowering product prices as consumption has not picked up since the ‘reopening’ is also adding to downward pressure on prices.
The problem is that the policy response card is not suitable. Usually, when the economy slows down, the People’s Bank of China boosts the economy by lowering the benchmark interest rate or the reserve requirement ratio. Recently, however, it is burdensome to carry out bold monetary easing policies due to the burden of the weak yuan.