In the face of both domestic and international challenges, China’s economic trajectory continues to exhibit growth momentum, rendering the prospect of deflationary risk unlikely. The prevailing market demand and bolstered business confidence are crucial components driving this robust economic recovery. Experts and authorities have pointed out that despite a recent dip in the consumer price index (CPI), there are compelling reasons to believe that this decline is temporary and not indicative of a broader deflationary trend.
The recent data from the National Bureau of Statistics (NBS) reveals a 0.3 percent year-on-year decline in the CPI for July, following a flat reading in June. However, experts argue that this decline is primarily attributed to the high base established during the corresponding period in the previous year. Dong Lijuan, a statistician at the NBS, highlights this factor as a significant driver of the recent decrease.
One notable aspect of the data is the decline in food prices, contributing to a 1 percent year-on-year decrease in the CPI. The abundant supply of pork, a staple meat in China, and seasonal fruits and vegetables have played a role in dragging down food prices. It’s important to emphasize, however, that the core CPI, which excludes food and energy prices, has actually increased by 0.8 percent year-on-year, indicating that demand is stabilizing and gradually recovering.
A deeper analysis of the monthly data paints a more optimistic picture. China’s CPI saw a 0.2 percent increase on a monthly basis in July, reversing the decline registered in June. This reversal marks a positive shift and is the first instance of a monthly increase in CPI since February of the same year.
Experts emphasize that the decline in CPI is largely driven by supply-side factors, particularly the surplus in food supply. This does not overshadow the fact that demand indicators, such as core commodity CPI and core service CPI, have experienced a strong rebound. This trend underscores the reality that demand has shown considerable recovery and sets the stage for a potential CPI rebound in the coming months.
Liu Guoqiang, deputy governor of the People’s Bank of China, has also weighed in on the matter. He asserts that deflation is not a current concern, and there’s no anticipated deflationary risk in the latter half of the year. This sentiment is echoed by experts, who believe that short-term indicators indicating a slowdown in domestic demand are temporary in nature.
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China’s response to these challenges has been proactive and comprehensive. Policy commitments targeted at various sectors, including consumption, the private economy, property markets, and forex markets, have been unveiled to bolster economic resilience. Initiatives aimed at promoting consumption, a cornerstone of economic growth, have been unveiled by the National Development and Reform Commission. These initiatives are designed to stimulate consumer spending on a range of goods and services, contributing to economic growth.
The restoration of business confidence and the resilience of China’s small and medium-sized enterprises (SMEs) further indicate a positive trajectory. The SME development index witnessed gains in sectors like real estate, social services, transport, and catering, signaling growing recovery momentum. This economic resurgence is clearly different from historical instances of deflation, and the growth of M2, a measure of money supply, supports this argument.
Amidst these encouraging developments, China’s economy expanded by 6.3 percent in the second quarter, a notable acceleration from the previous quarter’s 4.5 percent. The first half of the year registered a 5.5 percent growth, surpassing the government’s set target for 2023. The M2 also grew by 11.3 percent year-on-year, contributing to a healthy money supply.
Forecasts by experts anticipate a gradual rise in consumer prices as the impact of pro-growth policies becomes more pronounced. Factors such as real estate completions and service consumption are expected to drive up the core CPI. With sustained economic recovery, expanding market demand, improved supply and demand dynamics, and the diminishing influence of last year’s high base, the outlook for China’s CPI is optimistic.
While China’s economy faces its share of challenges, there is no imminent deflationary risk on the horizon. The combination of measures taken by authorities, resilient market demand, restored business confidence, and the overall trajectory of economic recovery supports the assertion that the recent decline in CPI is a short-term phenomenon.