China's Economy Plunges Back Into Deflation

China's economy re-entered deflation in October, primarily influenced by a significant drop in pork prices, indicating ongoing challenges in revitalizing consumer demand amidst a property sector crisis and post-pandemic control relaxations. The consumer price index (CPI) showed a decline of 0.2% year-on-year, diverging from a forecasted 0.1% decrease. This shift follows a period of stagnant CPI in September. Concurrently, producer prices fell by 2.6%, marking the 13th consecutive month of decline.

A notable 17.9% fall in livestock and meat prices, led by a 30.1% decrease in pork costs, significantly contributed to these trends. In contrast, non-food prices saw a modest 0.7% rise. Despite these developments, the Chinese markets remained relatively stable, with minor fluctuations in the CSI 300 index and the renminbi against the dollar.

Recovery Hopes Dampened Amid Price Fluctuations

China's economy has displayed inconsistent recovery signals in recent months, sparking debates among economists about achieving the government's 5% GDP growth target for the year. The IMF recently raised its GDP growth forecast for China to 5.4% , acknowledging increased policy support targeting the real estate market stabilization.

Low consumer confidence has been identified as a key factor behind subdued inflation figures. The volatility in pork prices, a major component of China's CPI due to its boom-and-bust cycles, has further compounded the issue. Analysts from Goldman Sachs anticipate a gradual CPI increase in the coming months, although they note that ongoing deflation in pork prices may slow this progress.

ING economist Rob Carnell challenges the view that China is experiencing deflation, which typically encompasses declines in consumer prices, asset values, and wages. Instead, he suggests that the current situation reflects an excess supply situation rather than a demand collapse.

Mixed Economic Indicators And Future Outlook

Recent economic indicators present a varied picture. China's exports have fallen for six consecutive months, with a 6.4% decline in October. Manufacturing activity also contracted during this period. However, a 3% rise in imports, the first year-on-year increase since February, offers a positive signal.

Economists emphasize the need for more government intervention to boost domestic consumption and address weak demand. While a 1 trillion RMB bond has been announced for local government initiatives, its impact is expected to be more pronounced in the subsequent year. Analysts caution that, despite a low base effect benefiting the economy this year, 2023 might pose greater challenges for GDP growth unless the recovery momentum strengthens.

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