China is grappling with a severe economic setback as its consumer prices experience the sharpest decline since the 2009 global financial crisis. The National Bureau of Statistics reported a 0.8% drop in the consumer price index for January compared to the previous year, surpassing economists’ expectations of a 0.5% decline. The producer price index also fell by 2.5%, extending a 16-month deflationary trend in factory-gate costs.
This alarming data intensifies the pressure on the Chinese government to take decisive actions to bolster the faltering economic recovery and counter the turmoil in the markets. Despite previous efforts, including injecting long-term cash into banks and issuing more government bonds, confidence in China’s economy continues to wane.
The persistent deflationary pressure, as highlighted by the CPI data, emphasizes the need for urgent and aggressive measures to prevent entrenched deflationary expectations among consumers, according to Zhiwei Zhang, the president and chief economist at Pinpoint Asset Management Ltd.
China’s struggle with falling prices over the past year, coupled with challenges in reviving domestic demand and consumer confidence, underscores the magnitude of the economic challenge. Policymakers face the daunting task of implementing aggressive policy steps to boost demand and restore confidence in the economy.
Economists foresee the deflationary pressure continuing for at least another six months, mainly attributed to real estate turmoil. The risks of deflation are substantial, as it could lead to a downward spiral, with consumers postponing purchases in anticipation of further price declines, ultimately impacting overall consumption and business sectors.
As China strives to achieve its official growth goal, the current economic hurdles, including prolonged property issues and stock market volatility, are affecting household sentiment. Analysts, like Raymond Yeung from Australia & New Zealand Banking Group Ltd., stress the imminent need to cut rates as a crucial measure to counteract deflationary pressure and navigate the challenging economic landscape.
