The great problem of the Chinese economy: deflation as a permanent threat

The deflationary pressures of China they do not disappear, which underlines the fragility of economic recovery as 2023 enters the home stretch. The data to be published on Thursday will probably show that Chinese consumer prices They fell into deflation again during the month of October, according to economists surveyed by the Bloomberg agency. Producer prices are also likely to decline for the 13th consecutive month..

Consumer costs have been stubbornly weak this year. The consumer price index entered deflation in July and has since teetered on the brink of negative year-on-year growth. Although the People’s Bank of China stated in August that prices would recover from the bad summer streak, a new drop could show that this assessment was too optimistic.

Morgan Stanley believes China could face a prolonged fight against falling prices in the coming yearswriting recently that Beijing is “in the initial phase of the battle against deflation” as it moves away from a “overextended, credit-fueled growth model“.

Weak inflation figures would add more uncertainty to the country’s growth prospects after an unexpected contraction in manufacturing activity and the slowdown in growth in the services sector in October.

“China’s consumer demand remains weak,” said Larry Hu, head of China economics at Macquarie Group Ltd., adding that the biggest contraction in China’s economy has come in recent years. In his opinion, the Gross Domestic Product (GDP) deflator, the broadest measure of prices in the countrywill probably be negative in the last three months of the year. It has already declined for two consecutive quarters for the first time since 2015, according to Bloomberg estimates based on official data.

China: data to be published may not be favorable

Other reports to be released in the coming days may offer additional clues about the trajectory of the economic recovery. Tuesday’s export figures are likely to show that the fall was reduced in October in annual termsalthough this is partly due to a lower comparison base with a month in 2022 when China was still struggling with pandemic-related lockdowns.

Last month’s credit data may also be published, which are likely to show a rebound in global financing compared to a year ago, due to the arrival on the market of an avalanche of State bonds.

Expectations are growing that the central bank will provide more liquidity through a cut in the required reserve ratio, which is the amount of cash that banks must keep in reserve. Some analysts predict the central bank could do so before its monthly lending operations in mid-November, as increased public debt issuance puts pressure on interbank liquidity.

The Chinese Prime Minister He promised last Sunday that his country will expand market access and will also boost imports, which have fallen this year.

“We will continue to promote opening-up, with greater inclusiveness and benefit-sharing,” Li Qiang said in a speech to open the China International Import Expo in Shanghai on Sunday, adding that China “will actively expand imports“.