China’s Economy Grapples with Deflation
China’s economy is facing a significant challenge: persistent deflation. For the first time in three months, the consumer price index (CPI) has fallen, slipping 0.4% from a year ago. This dip below zero is a clear signal of weakening demand within the world’s second-largest economy.
This marks the third consecutive year of deflation for China, a first since it began its transition away from a centrally planned economy in the late 1970s. The decline in prices across nine straight quarters reflects a fundamental mismatch between the goods and services available and the public’s willingness to spend. This imbalance is putting a strain on company balance sheets and reducing the earnings of both households and the government.
The Cause: Weak Domestic Demand and Intense Competition
A major driver of this deflation is frail domestic demand. Retail sales for big-ticket items like cars and home appliances have seen significant drops. This is compounded by fierce competition among businesses, which is driving down prices and eroding profits. While the government aims to curb this competition to help reverse the trend, the ongoing weakness in consumer spending is a major obstacle.
Even the producer-price index (PPI), which tracks prices at the factory level, has been in negative territory for 35 straight months, though its decline has recently narrowed slightly.
Uncertainty Looms Over Recovery Efforts
There’s a lot of uncertainty about whether prices will rebound. While there have been some early signs of reduced output for commodities like coal and steel, it’s not yet clear if this can be sustained. For instance, a lithium mine that temporarily halted production—causing a price hike—is already preparing to restart sooner than expected, underscoring the instability of any policy-driven price changes.
Broader Economic Slowdown
The deflationary pressures are part of a wider economic slowdown. According to Bloomberg Economics, China’s economy has been decelerating since the summer and lost further momentum in August. This is also reflected in the export sector, where growth slowed to a six-month low as shipments to the U.S. continued to slump.