China’s consumer prices fall fastest in 3 years, factory-gate deflation deepens

Shanghai: China’s consumer prices fell 0.5 percent year on year in November, the sharpest decline in three years as the world’s second-largest economy grapples with worsening deflation.

Consumer prices dropped by more than the 0.2 percent decline forecast by a Bloomberg survey of economists and exceeded October’s fall of 0.2 percent.

Producer prices, which are measured at factory gates and heavily driven by the cost of commodities and raw materials, dropped by 3 percent and have remained in negative territory for the past year.

Consumer prices entered deflationary territory in July and briefly rose in August before falling again in October.

The deflationary trend adds to an array of economic pressures facing the country’s policymakers, including a liquidity crunch in the property sector, weak trade data and a slowing recovery from three years of zero-Covid lockdowns and border closures.

Consumer demand has struggled to fully rebound in 2023, while policymakers have set an economic growth target of just 5 percent, the lowest rate in decades.

Xu Tianchen, senior economist at the Economist Intelligence Unit, said the data would be alarming for policymakers and cited three main factors behind it: falling global energy prices, the fading of the winter travel boom and a chronic supply glut.

"Downward pressure will continue to rise in 2024 as developers and local governments continue to deleverage and as global growth is expected to slow," Xu said.

Bruce Pang, chief economist at Jones Lang Lasalle, said the weak core CPI reading was a warning about persistently sluggish demand, which should be a policy priority for China if it is to deliver more sustainable and balanced growth.

Although consumer prices in the world's second-biggest economy have been teetering on the edge of deflation in recent months, China's central bank Governor Pan Gongsheng said last week inflation was expected to be "going upwards".

Beijing has faced calls to step up stimulus this year in light of a prolonged property slowdown after several developers defaulted.

The government has cut key lending rates and issued new bonds to support growth but has stopped short of any major bailouts of developers.

China’s leader Xi Jinping this week warned that the country’s economic recovery was still at a “critical stage” as officials pledged to step up fiscal and monetary support.

Rating agency Moody’s Investors Service on Tuesday cut its outlook on China’s sovereign credit rating to negative, citing growing risks of lower midterm economic growth and the rising likelihood of greater financial support to weak regions.

Economic momentum in China has been hit in recent months by the

default of Country Garden, the country’s biggest private developer by sales, as well as turmoil at investment company Zhongzhi in a sign of spillover effects from a troubled real estate market.

Policymakers in August stopped publishing youth unemployment data after the metric hit a record since they began reporting it in 2019.

Consumer prices have been affected this year by declining pork prices, an important constituent in the basket of goods in China’s consumer index. Food prices fell by 4.2 per cent in November.

The prolonged weakness in consumer prices contrasts with inflation in other major economics after they lifted Covid-19 measures and points to anaemic demand from households in the face of continued caution in their spending. Data this week showed imports dropped 0.6 per cent last month.

Data next week will indicate the pace of retail sales growth in November. In October, they grew 7.6 per cent, buoyed by a low-base effect from a year earlier, when Covid shutdowns intensified just before they were abruptly abandoned at the end of the year.

The authorities will spur domestic demand and enhance economic recovery in 2024, the Politburo, a top decision-making body of the ruling Communist Party, was quoted by state media as saying on Friday.

Markets are awaiting more government stimulus at the annual agenda-setting "Central Economic Work Conference" later this month.