China returns to brink of deflation amid precarious recovery

SHANGHAI – China’s consumer inflation rate unexpectedly flatlined in September while factory-gate deflation persisted, suggesting the economy’s path to growth is still fragile and in need of additional support.

The consumer price index (CPI) was unchanged in September from a year earlier, the National Bureau of Statistics (NBS) said on Friday, weaker than expectations for a slight increase and edging closer to the deflationary level it fell to in July.

Core CPI – which strips out volatile food and energy costs – rose 0.8 per cent, the same as in August.

Producer prices fell 2.5 per cent, moderating slightly from the prior month’s decline.

“September inflation data came out below consensus, suggesting a long way to go for the PBOC’s (People’s Bank of China’s) fight against deflation,” said Mr Xing Zhaopeng, a senior China strategist at Australia and New Zealand Banking Group.

“The government has announced hundreds of counter-cyclical measures to boost domestic demand, but consumer confidence remains weak.”

China’s economy has shown signs of stabilisation in recent weeks, with factory activity picking up and declines in exports easing.

But there is lingering concern over the recovery, which still faces drags from a property crisis and waning sentiment.

Chinese consumers

travelled and spent less over the recent Golden Week holiday

period than the government had hoped, while lukewarm home sales stirred concerns about whether more support will be needed to bolster growth.

Chinese stocks declined on Friday. The Hang Seng China Enterprises Index lost 2.4 per cent, while the CSI 300 fell 1 per cent.

Golden Week may have accounted for slower growth in food prices, according to NBS chief statistician Dong Lijuan, who in a statement attributed the softer rate to ample food supply prior to the holiday.

She also cited a high base of comparison with 2022 as a reason for the flat CPI.

Earlier this week, Bloomberg News reported that the government is considering raising its budget deficit for the year as part of a plan to spend more on infrastructure – a form of stimulus to help the economy meet an official growth target of about 5 per cent.

Economists also expect policymakers to consider other measures before the end of 2023, including another cut to policy rates.

That may not come for another month or two, though: Analysts expect the PBOC to hold the rate on its one-year medium-term lending facility steady next Monday.

Monetary policy room may be constrained depending on future moves by the United States Federal Reserve.

US consumer prices advanced in September at a brisk pace,

reinforcing the Fed’s intent to keep interest rates high to bring down inflation.

The International Monetary Fund (IMF) recently cut its growth forecast for China for 2023 to 5 per cent from 5.2 per cent, and for next year to 4.2 per cent from 4.5 per cent.

The economy is losing momentum because of declines in real estate investment and housing prices that endanger government revenues from land sales, as well as weak consumer sentiment, according to the IMF.

Additional data next week will also provide more clues on the state of the economy in the third quarter, including gross domestic product figures and indicators on retail sales, industrial output and unemployment. BLOOMBERG