China’s rising prices create uncertainty amid the property crisis

The pace of inflation in China is the lowest since the financial crisis. This has led to concerns about the weakening demand in the second largest economy in the world.

According to the National Bureau of Statistics, China’s consumer price index fell to -0.8% on an annualized basis in January. This is the largest drop since September 2009, and down from the -0.3% in December. Analysts had predicted a -0.5% deflation, but the scale was much worse. Prices rose by 0.3 percent on a monthly basis. This is up from 0.1 percent the previous month.

The overall decline in January prices was largely due to a sharp drop in the prices of food and tourism. This is attributed by experts to the timing for the lunar new year celebrations, this week, and the unfavourable base effect when compared to January last year when China had emerged from Covid locks and a sharp rise in consumer spending.

Uncertainty about the health and the underlying structure of the Chinese economy has combined with record-high youth unemployment, a crisis in property and the threat to cause turmoil to the financial system.

Deflation can be as damaging to an economy as inflation. A deflationary cycle can be created when households and businesses halt spending in anticipation of further price drops. In a deflationary climate, companies tend to make less profit and reduce investment. Policymakers can also overstimulate the economy to try to increase prices.

Beijing has taken a series of measures to boost consumption, investments and the stock market. Earlier this month, the cabinet replaced Yi Huiman, the chairman of China Securities Regulatory Commission, with Wu Qing. Wu Qing was the chief of Shanghai Stock Exchange. This move signaled the political intent to stop the slide of Chinese stock prices.

The CSI 300 index, China’s leading stock index has experienced a mini revival, rising by more than 4% in the last week. Meanwhile, the Hang Seng index, Hong Kong’s largest stock index, rose by about 1%. Over the last year, however, both indices have fallen by 18% and 26% respectively.

In recent days, trading in top stocks has increased as Beijing’s “national teams” of financial institutions have become more involved in the stock exchange in an attempt to boost valuations. In 2015, the government chose a group of twenty large or state-linked institutions, such as Citic Securities and Haitong Securities to purchase equities in order to boost market sentiment.

In China, several key interest rates have been reduced. Last month, the amount of capital that banks must hold in reserve has also been reduced. The government also increased borrowing targets for investment.

Analysts say that the Chinese Communist Party needs to do more in order to achieve its goal of “high-quality growth”. CCP will be expected to outline its plans for strengthening the economy at its “Two Sessions Conference” in March.

Pantheon Macroeconomics analysts said that the consumer demand will only recover gradually, as people are worried about their income prospects in an uncertain economic environment. Consumer sentiment is still soft, and property prices have a U-shaped recovery.

Capital Economics, a consultancy, also said that “Structural inequalities between supply and demand will likely mean that core inflation remains subdued compared to pre-pandemic standards for the foreseeable.”

Separate figures measuring prices of producer goods indicate that consumer products prices fell by 1.1% in January. This indicates a softening of consumer spending. In January, the price of pork, which is eaten in China on a large scale, fell 17.3% year-on-year. Headline producer prices dropped 2.5 per cent.

According to NBS figures for last year, China’s economy grew by 5.2 percent, meaning that Beijing met its annual growth goal. The International Monetary Fund expects the expansion to slow down this year and in 2019. It is forecasting a gross domestic product increase of 4.6% and 4.1% respectively by 2024 and 2025.