Deflation threat returns to haunt Chinese economy as risks from US trade war linger

  • Both consumer price index and producer price index fell on a monthly basis due to weak demand and a steep drop in oil prices
  • Bad news follows slower than expected drop in imports and exports
Topic | China economy

Zhou Xin

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Weak consumer and investor demand will be another headache for economic policymakers. Photo: EPA-EFE

China suffered another economic blow on Sunday with the return of the deflation threat, a day after it reported slower than expected growth in exports and imports.

A fall in both consumer and producer price indexes was a result of weakness in demand from both Chinese consumers and investors and reflected their reluctance to spend as confidence in future growth is undermined by the trade war with the US.

The figures add the challenge faced by the Chinese leadership in keeping economic growth on track ahead of the annual central economic work conference, where policies for next year will be determined.

China’s trade surplus with US reaches record level

Last month the consumer price index fell 0.3 per cent from October while the producer price index dropped 0.2 per cent – the first month-on-month fall in seven months – due to the steep fall in the price of crude oil and coal, according to data released by the National Bureau of Statistics on Sunday.

On a yearly basis, China’s PPI rose only 2.7 per cent in November, the lowest reading in two years, while China’s CPI in November rose 2.2 per cent from a year earlier, the lowest in four months, the official statistics showed.

Analysts said deflationary pressure was set to continue as economic activities to weaken.

Jiang Chao, an analyst with Haitong Securities, wrote in a note before the Sunday data was released that China’s PPI would drop to zero in December and fall further into negative territory in 2019, officially putting China in a deflationary zone.

The return of deflation risks, which often associated with a contraction in economic activities, provides fresh evidence that China’s US$12 trillion economy is heading into trouble, even though China and US have agreed a 90-day truce in the trade war during which they will try to resolve their differences.

The official purchasing managers index, a leading indicator of economic growth, showed activity in China’s vast manufacturing sector stalled in November for the first time in over two years as new orders shrank.

The country’s exports decelerated rapidly last month, although China’s trade surplus with the US widened to a record level, the Chinese customs administration said on Saturday.

The Chinese government has been trying to shore up confidence in the country’s economic prospects since the summer and shifted its policy priority from cutting debt to bolstering growth.

However, signs of stress continue to mushroom in the economy.

Chinese state research signals reluctance to change economic model

Economic data from the first three quarters of the year has suggested that as many as 19 provinces have fallen behind their annual GDP targets and many local governments are scrambling to spur investment so that they can meet their growth targets for 2018.

The Chinese government has expressed its concerns about unemployment and promised to give cash subsidies – in the form of a partial refund of unemployment insurance payments – to employers if they do not cut their labour force.

China’s economic growth also slowed to 6.5 per cent in the third quarter of this year from 6.7 per cent in the second quarter of this year.

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Zhou Xin co-leads the political economy team at the Post. He mainly covers economic stories but also writes about Chinese politics and diplomacy. He has previously worked for Reuters and Bloomberg in Beijing.
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