China, the world’s second-largest economy and population, has faced a constant decline in prices for three consecutive quarters in 2023, continuing into 2024, impacting China’s reputation globally.
Image Source / Credit: LSEG (London Stock Exchange Group) Datastream via Reuters
CPI (Consumer Price Index) is indicated in orange with PPI (Producer Price Index) indicated in grey, showing %change Y/Y (year on year)
On the 8th of February, the inflation data for January was released by China, focusing on two important indexes. The first index measured was the Producer Price Index (also known as PPI), which measures the change in the cost of commodities or material used as inputs for the industry – helpful in measuring inflation for the industry as a whole. The second index measured was the Consumer Price Index (also known as CPI), which looks at the inflation for consumers themselves, calculated by looking at the change in the cost of commonly bought goods purchased by a consumer.
According to the report, the PPI was not of concern to the Chinese government (controlled by the Chinese Communist Party), but rather the CPI (that had a 0.5% decline from -0.3% to -0.8%). This is because the PPI rose by 0.2% (from -2.7% to -2.5%) and is also influenced by global prices for commodities.
The major decline in CPI is known to have been caused by a 2.2% fall in food prices, especially pork (a food that accounts to 60% of the Chinese meat industry). According to analysts around the world, a fall in price is usually due to increased supply or productivity, however, in China, it is due to a lack of demand. This can also be seen when consumption only accounts for 34% of China’s GDP.
Image Source / Credit: Wikipedia
Since 2020, Evergrande, one of the biggest Chinese property developers, faces a liquidity crisis like many other developers in China. China has also constantly faced problems with overconstruction of property.
One major reason for the reluctance in consumption by the population is that workers are underpaid by the government, given that the CCP aims to decrease manufacturing costs to increase exports. However, with lower incomes, individuals do not have a large proportion of disposable incomes, and with property being one of the most expensive in the world (taking up to 75% of a consumer’s income), consumers have decreased their spending significantly. Additionally, with the values of houses constantly falling as the property sector struggles, the population tries to accommodate a larger share of their income towards saving.
Furthermore, with a significant decrease in participation in the stock market, the Chinese government was forced to intervene and buy stocks to keep prices high (until the prices fell to a 5-year record). Moreover, with the constant lack of demand, prices are being lowered even more by increasing the supply of consumer goods such as pork, however, despite lower prices, consumption is still falling rapidly (for instance, the was an estimated 2% to 3% decrease in the consumption of pork). Unfortunately, this has led to many businesses and pig farmers facing bankruptcies and has led to the CCP buying large quantities of consumer goods in sectors elsewhere as well, in order to protect even more businesses from facing bankruptcy.
With this period of deflation being the longest ever in Asia since the late-20th century driven by a constant decrease in demand / confidence rather than an increase in productivity, the Chinese government is concerned as to when the deflation may stop, given that consumers may be more reluctant to buy goods and services that depreciate in value significantly (year on year). This leads to the government attempting to manage this by providing support to households in terms of money, however, the insignificant change in demand will mean that the government will have to implement other policies or rely on foreign demand that is changing as more countries try to reduce imports from China, for example, the USA.