China Deflation Expected to Impact Policy Decisions in Near Future
China is facing growing concerns over deflationary pressures as recent data points to widespread price declines and weak demand. Despite some attempts to stimulate Inflation, policymakers are primarily focused on real GDP growth rather than nominal Inflation figures.
According to Citi Research analysts, the timing of when deflation will become a more significant consideration in policy decisions depends on whether authorities perceive real growth to be at risk.
Recent Inflation readings from August highlight the deflationary pressures in China. While food prices saw a surge due to supply disruptions, overall weak demand offset this increase. Core Inflation, excluding volatile components, dropped to its lowest level since 2016, with sectors like home appliances and automobiles experiencing sharp declines.
The Producer Price Index (PPI) also showed deeper deflation than expected in August, driven by falling commodity prices. Despite the surge in food prices, the underlying demand weakness persists, especially with upcoming online sales events potentially adding further downside risks to Inflation.
Structural issues within the Chinese economy continue to contribute to the deflationary environment, with consumer sentiment remaining fragile and demand across most sectors remaining weak.
Citi Research highlights two main impacts of deflation in China. First, it could lead to a vicious cycle where falling prices reduce corporate revenues, leading to weaker wages and diminished household demand. Second, deflation could increase the disconnect between macroeconomic indicators and policy responses, as policymakers focus on real GDP growth rather than Inflation concerns.
While some minor reflationary efforts have been made, they are seen as sector-specific adjustments rather than broad-based measures to counter deflation. Without an improvement in end demand, these strategies are unlikely to reverse the deflationary trend.
For now, policymakers do not view nominal deflation as an immediate threat to the broader economy, with the primary focus remaining on steady real growth. However, if economic conditions worsen and risks to real growth become more pronounced, deflation will likely become a more significant factor in shaping policy decisions.
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Emma Collins, graduated in Financial Economics from the University of Chicago in the USA in 2016. She has since worked at an asset management firm in New York, where she specializes in investment strategies and portfolio management. Emma has a keen interest in financial analysis and has published several articles in renowned financial journals. Her work focuses on providing actionable insights to investors, and she is known for her forward-thinking approach to managing financial portfolios.