Economic data recently released from China has raised concerns as consumer prices continue to decline compared to the previous year. This poses a significant challenge for the world’s second-largest economy as it strives to recover from the impact of the Covid-19 pandemic.
Despite this disheartening news, the stock market remained relatively stable on Thursday. The Shanghai Composite saw minimal changes, while Hong Kong’s Hang Seng experienced a slight 0.3% decline. Notably, prominent retailers such as Alibaba and JD.com faced even sharper drops in their share prices.
While some may describe it as deflation, the recent negative inflation of 0.2% in October does not entirely fit the traditional definition. Economists typically define deflation as a sustained period of declining consumer prices and asset values, with widespread detrimental effects on the economy.
The current situation is characterized by a low rate of underlying inflation, indicating relatively weak domestic demand. According to ING analyst Robert Carnell, deflation is an extremely concerning condition that leads to a significant slowdown in economic activity. However, he emphasizes that China currently faces a different scenario marked by relatively weak domestic demand.
One of the key factors contributing to the decline in inflation is a decrease in food prices, particularly a substantial 30% annual drop in pork costs. This marks the second negative reading since July, with prices remaining stagnant in both June and September.
These latest figures on consumer prices follow separate data indicating a decline in exports in October, as well as an unexpected contraction in manufacturing. China continues to grapple with the aftermath of a massive property slump and a sluggish recovery since the lifting of pandemic restrictions over a year ago.
To address these challenges, the government has implemented targeted stimulus measures to reignite economic growth without risking another surge in asset prices. Despite the setbacks, the country’s central bank governor remains optimistic, stating that China is on track to achieve its growth target of 5% for the year.