December 3, 2023

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Deflationary pressures in China ease as consumer prices rise

Deflationary pressures in China ease as consumer prices rise

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China’s economy emerged from recession in August, as Beijing struggles to boost growth and revive investor confidence in the wake of a slump in the country’s property market and declining exports.

The consumer price index rose 0.1 percent year-on-year in August, lower than a Reuters poll of analysts’ opinions for a 0.2 percent increase, but emerging from the negative 0.3 percent zone recorded in July.

Meanwhile, the producer price index fell by 3 percent year-on-year, in line with analyst expectations and underscoring continued weakness in the industrial sector. But the decline was less severe than July’s 4.4 percent drop. Producer prices also rose by 0.1% on a monthly basis.

The Chinese National Bureau of Statistics said on Saturday that the consumer price index rose on average 0.5 percent in the first eight months of the year compared to the same period in 2022.

The continued weakness in inflation in the world’s second-largest economy comes as Beijing launches a wave of measures to try to boost demand, which has faltered since China emerged from crushing coronavirus lockdowns last year.

The country’s real estate market, which accounts for about a quarter of economic activity, remains in a state of vital support as major private developers suffer from a liquidity crisis and buyers are reluctant to venture into the market.

Policymakers cut mortgage interest rates and eased stringent requirements for loans, but analysts described the measures as “piecemeal” and called for more fiscal stimulus to boost demand.

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Goldman Sachs said the stronger CPI number was largely due to strong non-food inflation, including higher crude oil prices.

While food prices fell 1.7 percent in August, the non-food CPI rose 0.5 percent after being flat in July, the Chinese Bureau of Statistics said.

“For headline CPI, we expect a U-shaped recovery,” analysts at Goldman Sachs said, predicting that energy prices will bottom this year and services inflation will pick up as the government’s economic interventions take effect.

The central problem facing Beijing is that weakness in the domestic economy has coincided with a decline in the country’s exports, as inflation in the West suppresses consumption.

The Chinese Bureau of Statistics said that prices of consumer goods fell by 0.7 percent, and prices of services rose by 1.3 percent.

Among the items included in the producer price index, prices of construction materials and non-metallic materials fell by 6 percent, while prices of ferrous metal materials fell by 5.6 percent.

China’s disappointing growth and declining exports have stimulated foreign investor outflows from Chinese stock markets and have contributed to the weakening of the value of the renminbi to levels not seen against the dollar since 2007.

China’s exports fell by 8.8 percent in August from a year ago, according to figures released this week, but the contraction was marginally less severe than analysts had expected.

This also represents an improvement from a 14.5 percent decline in July, the worst since the start of the coronavirus pandemic.