China’s Consumer Prices Experience Third Consecutive Monthly Decline

China’s consumer prices have recorded a third consecutive monthly decline, raising concerns and increasing pressure on policymakers to address challenges faced by the world’s second-largest economy. According to official statistics released on Friday, the country’s consumer price index fell by 0.3% year-on-year in December, with producer prices also dropping by 2.7%.

The slight improvement from November’s figures, where consumer prices declined by 0.5% and producer prices slid 3%, underscores the ongoing economic challenges. China entered deflation in July, and since then, prices have remained flat or fallen in nearly every month except August. Policymakers are grappling with weakened trade, fragile consumer sentiment, and a gradual slowdown in the property sector following strict anti-pandemic measures over the past three years.

To address these challenges, Beijing has implemented various stimulus measures, including adjusting critical lending rates and facilitating access to credit, particularly in the property sector, which traditionally contributes to over a quarter of economic activity.

Officials are aiming for a gross domestic product (GDP) growth target of approximately 5% in 2024, similar to the 2023 mark, which marked the lowest GDP growth in decades. Analysts, however, express uncertainty about the effectiveness of current policies in offsetting deflationary pressures and promoting economic recovery.

In 2023, full-year inflation was modestly positive at 0.2%, falling significantly short of the official upper target of 3%. The producer price index, influenced by global costs of raw materials and commodities, has consistently declined since October 2022.

Trade data released on Friday showed positive signs, with China’s exports climbing 2.3% in December compared to the previous year, exceeding forecasts. Import figures for December edged up 0.2%, defying expectations of a decline and reversing November’s contraction. However, exports for the full year 2023 fell by 4.6%, the first annual decline since 2016, attributed to higher global inflation affecting demand for Chinese goods.

Despite these challenges, China’s trade surplus for 2023 amounted to $823 billion, a decrease from the previous year’s record figure of $878 billion.

Analysts at Capital Economics pointed out that the growth in December exports was partly due to exporters reducing prices to gain market share, impacting already low industrial profits. Concerns persist about the sustainability of this growth without the support of price cuts, especially amid a post-pandemic pullback in global goods demand.

The People’s Bank of China is anticipated to cut its medium-term lending facility on Monday, a policy tool to inject liquidity into the financial system, for the first time since August. This move aims to address liquidity concerns and support economic stability.

Policymakers have also relaxed restrictions on home purchases in major cities, responding to signs of spillover risks following a series of property developer defaults. The recent bankruptcy declaration of Zhongzhi, a shadow banking conglomerate controlling various investment companies, underscores ongoing challenges in the financial sector.

China’s Consumer Price Index (CPI) has been affected by volatile pork prices in recent months, with core inflation, excluding energy and food, remaining flat in December, while services inflation rose by 1% year-on-year. Policymakers continue to navigate a complex economic landscape, implementing measures to stabilize the economy and spur recovery.

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