China has another massive headache now: It can’t stem deflation

A customer purchase vegetables at a supermarket on December 9, 2023 in Fuyang, Anhui Province of China.

A customer buys vegetables at a supermarket in Fuyang, Anhui province, in December.VCG/Visual China Group/Getty Images

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While many central banks around the world are still trying to cool inflation, China is grappling with falling prices.

The Consumer Price Index (CPI) dropped 0.5% in November on an annual basis, the biggest fall since the depths of the pandemic three years ago, according to data released by China’s National Bureau of Statistics on Saturday.

The drop marked an acceleration in the rate of deflation from October, when the CPI fell 0.2% from a year earlier, and prompted calls for urgent action from Beijing to boost demand and prevent a downward spiral of prices.

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The data come days after Chinese policymakers vowed to strengthen fiscal and monetary support to boost the world’s second biggest economy, which is struggling with a real-estate crisis, high youth unemployment and subdued consumer confidence.

China has been fighting weak prices for most of this year due to the property market slump and weak spending. Deflation is bad for the economy because consumers and companies may put off purchases or investments in anticipation of prices falling further. That in turn could further slow the economy, and create a vicious cycle.

Consumer inflation began slowing in February and turned negative in July for the first time in more than two years. It returned to positive territory in August and was flat in September, but fell back below zero in October.

“China’s deflation situation is deepening with the triple whammy from domestic food prices, international oil price corrections and weak domestic demand,” analysts from Citi said in a Sunday report.

“Signs of price weakness are now spreading from goods to services,” they added.

A woman selects clothes at a shopping mall in Beijing on June 15, 2023.

A woman selects clothes at a shopping mall in Beijing on June 15, 2023.Wang Zhao/AFP/Getty Images

Food prices were a major drag on the CPI, down 4.2% in November from a year earlier. In particular, pork prices plummeted 31.8%.

Gasoline prices declined after international oil prices hit their lowest level in months in November.

Services inflation also slowed. It was up just 1% from a year ago last month, compared with a 1.2% increase in October.

The Producer Price Index (PPI), which is mainly driven by prices of commodities and raw materials, dropped 3% in November, down for 14 months in a row.

More stimulus needed

The worsening deflationary pressure has cast further doubt over China’s economic recovery.

“There is no time for policy hesitation to prevent a vicious loop between deflation, confidence and activities,” the Citi analysts said.

Late last month, Pan Gongsheng, the governor of the People’s Bank of China, said in Hong Kong that China would keep monetary policy “accommodative” to support the economy, and expected consumer prices to rise in the coming months.

On Friday, China’s top officials convened for a Politburo meeting and vowed to do more to expand domestic demand and spur consumer spending.

The Politburo meeting, along with the annual Central Economic Work Conference (CEWC) that is expected later this month, typically sets the tone for economic policy for the coming year.

Investors are awaiting for more details from the CEWC about economic policy for next year, the Citi analysts, adding that they expect “imminent” cuts to the reserve requirement ratio — the amount of money banks must keep in reserve — and interest rates.

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