China Faces Deflation Pressure; Investors Call for More Economic Stimulus

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In September, China experienced increased deflationary pressures, as seen in weaker-than-expected consumer and factory prices. This situation has intensified calls for Beijing to implement a more substantial economic stimulus package.

The recent data comes at a time when China’s volatile markets are eagerly awaiting further details on Beijing’s stimulus plans. During a Ministry of Finance press conference on Saturday, more spending was promised, though specifics were sparse.

According to the National Bureau of Statistics, the consumer price index rose by 0.4 percent year-on-year in September, which fell short of a Bloomberg poll prediction of a 0.6 percent increase and was a decline from 0.6 percent in August. Meanwhile, the producer price index dropped by 2.8 percent year-on-year, beyond analysts’ forecast of a 2.6 percent decline. This marked the sharpest decline in six months, worsening from a 1.8 percent decrease in August.

Goldman Sachs attributed the consumer inflation support to rising food prices, driven by adverse weather conditions and seasonal demand preceding the Golden Week holiday starting on October 1.

The weak inflation figures indicate that China’s economy is grappling with deflationary pressures linked to a severe property crisis affecting household demand. Upcoming government data, set to be released this week, is expected to reveal a dual-speed economy characterized by strong trade performance counterbalanced by weak third-quarter GDP figures due on Friday.

Economists anticipate China’s third-quarter GDP growth to be below Beijing’s official target of 5 percent year-on-year. Analysts have warned that further economic slowdown coupled with export challenges, such as trade protectionism, may compel policymakers to enhance their actions.

Larry Hu, an economist with Macquarie, noted that if the current economic model falters, policymakers would need to escalate policy stimulus.

After incremental measures spanning months, the central bank introduced a more robust monetary stimulus at the end of September ahead of the national holiday, which invigorated China’s dormant stock markets. However, investors remain eager for Beijing to outline additional fiscal spending plans to complement the monetary efforts, though subsequent government statements have lacked detail.

Analysts pointed out that while markets demand a firmer stance on stimulus, Beijing is likely to refrain from inundating the market with credit, as previous strategies are believed to have contributed to a property market bubble.

Attention is now on the upcoming leadership meeting of the National People’s Congress, China’s legislative body, which must formally approve additional spending measures. A meeting is expected in the near future.

According to the statistics bureau, weaker producer prices were primarily influenced by declines in the “ferrous” metal smelting and rolling industry, down 11 percent year-on-year, and the petrol, coal, and other fuel processing industries, which decreased by 9.4 percent. Consumer goods factory prices also fell by 1.3 percent.

Regarding consumer prices, the bureau reported a decline of 6.9 percent in the price of “new energy cars”—electric vehicles—and a 6.1 percent decrease for cars with traditional engines.

China’s automotive market is characterized by intense competition and overcapacity, leading many manufacturers to boost low-cost exports.

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