China's economy, the world's second-largest, continues to grapple with deflationary pressures, despite a modest rise in consumer prices in August, driven largely by a surge in food costs due to extreme weather conditions. According to data released by the National Bureau of Statistics (NBS) on Monday, the consumer price index (CPI) increased by 0.6% year-on-year, slightly up from a 0.5% rise in July but below the 0.7% forecasted by economists. However, the uptick, primarily attributed to higher food prices, failed to alleviate concerns over a deeper deflationary trend as producer prices fell more sharply than expected.
The August CPI figures highlight the ongoing challenges facing China's economy, which has been struggling with weak domestic demand, a protracted housing market downturn, and rising global trade tensions. The modest inflation was largely driven by a 2.8% year-on-year increase in food prices, with pork prices surging by 16.1% and vegetable prices climbing by 21.8%. The rise in food costs was exacerbated by adverse weather conditions, including deadly floods and extreme heat, which affected 1.46 million hectares of crops across the country.
"The higher CPI in August was due to high temperatures and the rainy weather," NBS statistician Dong Lijuan noted. However, this weather-driven spike in food prices did little to counterbalance broader deflationary pressures within the economy, as core inflation, which excludes volatile food and energy prices, fell to 0.3% in August-the lowest level in nearly three and a half years.
Despite the slight increase in consumer prices, the producer price index (PPI), which measures the cost of goods at the factory gate, fell by 1.8% year-on-year in August, marking the steepest decline in four months. This drop was worse than the 0.8% decline recorded in July and below the 1.4% decrease anticipated by economists. The sharp fall in producer prices underscores the ongoing challenge of overcapacity and weak domestic demand that continues to weigh heavily on China's industrial sector.
"The ongoing deflationary pressures boil down to a broader problem of production surplus, which is still outstripping demand," said Junyu Tan, North Asia Economist at Coface. He added that while increased fiscal spending could potentially drive an uptick in domestic demand in the coming months, the current government policy remains too skewed toward investment rather than stimulating consumption, which could exacerbate the problem of overcapacity.
China's economic outlook has prompted global brokerages to revise their growth forecasts for the country in 2024, with many now predicting that growth will fall below the official target of around 5%. The former head of China's central bank, Yi Gang, highlighted the urgency of addressing deflationary pressures during a recent conference, emphasizing the need for more proactive fiscal policies to prevent deflationary expectations from becoming entrenched.
In response to the ongoing economic challenges, the Chinese government has launched several initiatives, including a national campaign to allocate $41 billion in ultra-long treasury bonds to support equipment upgrades and the trade-in of consumer goods. However, these measures have so far failed to significantly boost consumer confidence, with domestic car sales continuing to decline for the fourth consecutive month in July.
Gabriel Ng, assistant economist at Capital Economics, noted that while increased fiscal spending could help boost domestic demand, the focus on investment rather than consumer-driven growth may ultimately hinder the economy's recovery. "Government policy is still too skewed toward investment, and so increased fiscal spending may ultimately exacerbate the overcapacity problem," Ng said.
As China's economy struggles to regain momentum, the yuan has weakened against the dollar, and long-term yields have reached record lows, reflecting investor concerns over the country's economic trajectory. The Sentix investor confidence index for the eurozone, which is closely watched as a gauge of global economic sentiment, dropped to -15.4 in September, its third consecutive monthly decline, further signaling the potential for broader economic instability.
