China’s Economy Shows Further Stability as it Emerges from Deflation Phase

China’s consumer prices have returned to positive territory in August, indicating a smaller decline in factory gate prices. This suggests that deflationary pressures are easing as the economy shows signs of stabilization. However, analysts believe that more policy support is needed to boost consumer demand, particularly as the labor market recovery slows and household income expectations remain uncertain.

According to data from the National Bureau of Statistics, the consumer price index (CPI) rose 0.1% in August compared to the same period last year. While this is slower than the median estimate of a 0.2% increase, it marks a positive shift from the 0.3% decline in July. Core inflation, which excludes food and fuel prices, remained unchanged at 0.8% in August.

On the other hand, the producer price index (PPI) fell 3% year-on-year in August, in line with expectations. However, this marks a gradual improvement compared to the 4.4% drop in July, making it the smallest decline in five months. The narrowing of PPI deflation suggests a slow and moderate restoring process.

The decline in factory prices can be attributed to weak demand, reinforcing the need for more policy support in the foreseeable future. Food prices fell 1.7% year-on-year, while non-food costs rose 0.5%, driven by rising costs linked to tourism.

Despite the improvement in inflation and factory prices, China’s anaemic price changes stand in contrast to the surging inflation experienced by most other major economies since the end of the COVID-19 pandemic. As a result, China’s central bank may continue to implement measures such as interest rate cuts and changes to bank reserve requirement ratios to stimulate growth.

Premier Li Qiang has stated that China is expected to achieve its 2023 growth target of around 5%, but analysts remain skeptical due to factors such as a worsening property slump, weak consumer spending, and diminishing credit growth.