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China’s economy falls back into deflation in blow to recovery


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China’s economy edged back into deflation last month, spurred by falling pork prices, as policymakers struggled to reignite domestic demand in the midst of a rolling property sector crisis and following the end of strict pandemic controls this year.

The consumer price index fell 0.2 per cent year on year in October, data from the National Bureau of Statistics showed on Thursday, compared with a 0.1 per cent fall forecast by a Reuters poll of analysts. The CPI was unchanged in September.

Producer prices fell for a 13th consecutive month, dropping 2.6 per cent year on year, against a 2.7 per cent decline forecast by economists and following a 2.5 per cent contraction in September.

The NBS said the price of livestock and meat fell 17.9 per cent overall, driven by a 30.1 per cent decline in pork prices. Non-food prices rose 0.7 per cent.

Chinese market reaction was muted on Thursday, with the CSI 300 index of Shanghai- and Shenzhen-listed stocks flat and the renminbi weakening 0.1 per cent against the dollar after the data release.

China’s economy has shown mixed signs of recovery in recent months, leading economists to debate whether it will hit the government’s official gross domestic product growth target this year of 5 per cent, the lowest in decades. Prices fell into negative territory in July before edging back into growth in the months that followed.

The IMF this week upgraded its forecast for China’s GDP growth to 5.4 per cent, citing stronger support from policymakers, who have been easing monetary policy and restrictions on property purchases and mortgages to try to stabilise the real estate market.

Analysts have blamed low consumer confidence for soft inflation figures. Falling pork prices aggravated the trend in October. Live hog futures traded on China’s Dalian Commodity Exchange have dropped about 15 per cent this month.

Prices of the meat in China, the world’s largest producer and consumer of pork, follows boom-and-bust cycles, with oversupply leading to large price falls and causing CPI volatility.

Goldman Sachs said in an analyst note that China’s headline CPI should rise gradually in the coming months, although “persistent pork prices deflation is likely to slow the pace”.

Rob Carnell, economist at ING, disputed that China was suffering from deflation, which he defined as not just a decline in consumer prices but also in the prices of “real and financial assets and wages”.

“What China has right now is a low rate of underlying inflation, which reflects the fact that domestic demand is fairly weak,” he said. “What we are seeing today is mainly the result of a supply excess, rather than a collapse in demand.”

Other recent indicators have painted a mixed picture of the economic recovery. China’s exports dropped 6.4 per cent in dollar terms in October compared with the same period a year earlier, the sixth consecutive month of declines and worse than the 3 per cent fall forecast by a Reuters survey of analysts. Manufacturing activity also contracted in October.

One positive sign from the trade data was China’s imports, which expanded year on year for the first time since February, rising 3 per cent.

Economists argue the government needs to do more to stimulate domestic consumption and lift flagging demand in the economy.

Beijing has announced a Rmb1tn ($137bn) bond to fund local government disaster relief and flood controls, but this is seen as aimed at supporting growth next year.

While the economy in 2023 has benefited from a low base effect compared with a year earlier, when Covid-19 controls depressed activity, next year could prove more challenging for GDP growth unless the recovery gains more traction, analysts have warned.

Additional reporting by William Langley and Hudson Lockett in Hong Kong

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