Domestic demand in China has failed to start this year, households continue to save. The result is a return to moderate deflation in October. This, combined with a long-term decline in industrial producer prices, raises doubts about the economic recovery of the Chinese economy, although according to the latest data on the growth of gross domestic product, it looks set to meet the target of five percent annual growth.
The drop in consumer prices is mainly due to a deep drop in the price of pork, which fell by 30.1 percent year-on-year. Compared to September’s 22 percent, this is also an acceleration of the decline. An oversupply of pigs and weak demand are to blame, Reuters reported.
Even core inflation, which excludes food and fuel prices, slowed to 0.6 percent in October from September’s 0.8 percent, pointing to China’s continued struggle with disinflationary pressures and a growing risk of missing the government’s full-year headline inflation target, which is set at around three percent, Reuters added.
Imports to China rose unexpectedly in October, while exports fell more sharply
Consumer prices slipped into deflation in July, returned to positive values in August, but stagnated in September and fell again in October. “Problems with deflation are clearly visible, especially in month-on-month statistics. In month-on-month terms, in the last 12 months, prices have risen only four times,” noted Citfin analyst Tomáš Volf.
Factories are even worse off, as industrial producer prices fell by 2.6 percent year-on-year in October. Deflation has prevailed there for the 13th month in a row, so companies have, among other things, lower income to repay their debts.
Although price reductions may seem like a good result at first glance, the opposite is true. “Deflation is a problem because traders, distributors and manufacturers get less money for their goods. However, their costs are usually increasing or, at best, stagnating. They will help themselves temporarily by cutting their profits, but this cannot be done indefinitely. This is followed by cost cutting, then production, wages, employees, and if the deflation lasts long and is deep, then it inevitably leads to the closing of businesses,” explained Volf.
Beijing is trying to revive the economy with various support measures, but its efforts are hampered by the ongoing crisis in the real estate market, internal indebtedness, high unemployment among young people and the political split with the West. In addition, trade balance data came out a few days ago, revealing that while imports into China rose, exports fell more than expected.