Deflation returns in China as economy faces challenges on many fronts

Official figures in China have shown a return to deflation as the world’s second largest economy battles a series of challenges .

The National Bureau of Statistics, which had said in August that there would be “no deflation in the future” after a brief slip the previous month, said the main consumer price index (CPI) measure of inflation stood at -0.2% in October.

It meant that prices in China were 0.2% down on the same month last year.

Separate data on factory gate prices, which are an important measure of inflation ahead, showed a 2.6% decline.

It has been in negative territory now for more than a year.

Core inflation, which strips out volatile elements such as food and fuel, also fell back further towards parity at 0.6% compared to the 0.8% figure revealed for September. It suggests that downward pressure on prices is intensifying.

The headline CPI figure was dragged down by a further slump in pork prices of just over 30%.

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An oversupply of pigs and weaker demand among consumers generally drove the slump, the data showed.

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On the face of it, falling prices will be welcome for the Chinese people.

While the West is battling a cost of living crisis we have every reason to feel somewhat jealous.

But falling prices have a sting in the tail for economic and business activity and there will be consequences ahead, according to experts.

The Chinese economy has largely struggled to get back in full gear since authorities delayed calling an end to COVID restrictions.

Domestically, there is high debt and unemployment – particularly among young people.

Consumption, production and investment have all slowed as confidence has been eroded.

The latter has been damaged by a property crisis, with many real estate developers facing massive debt piles to the extent that some high-profile names, such as China Evergrande, are teetering on the brink – with many executives suspected of being to blame.

China’s powerhouse manufacturing sector is facing a collapse in demand, both at home and abroad, as Western economies slow due largely to inflation and central bank action to tame it, which has raised borrowing costs.

Nevertheless, the ratings agency Moody’s still expects China’s economy to grow in line with Beijing’s target rate of 5% this year, declining to around 4% in 2024.

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Bruce Pang, chief economist at Jones Lang Lasalle, told the Reuters news agency: “The data shows combating persistent disinflation amid weak demand remains a challenge for Chinese policymakers.

“An appropriate policy mix and more supportive measures are needed to prevent the economy from a downward drift in inflation expectations that could threaten business confidence and household spending.”

The government’s aid to date has included the raising of £112bn from a sovereign bond sale while it has also relaxed restrictions on what regions are allowed to borrow.

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