China's Economy Faces Fragile Growth as Inflation Stalls and Deflation Persists

China's consumer inflation rate surprised experts in September by remaining stagnant, while factory-gate deflation continued to persist. This indicates that the Chinese economy's path to growth is still precarious, necessitating additional support.

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China's consumer inflation rate surprised experts in September by remaining stagnant, while factory-gate deflation continued to persist. This indicates that the Chinese economy's path to growth is still precarious, necessitating additional support.

According to the National Bureau of Statistics, the consumer price index (CPI) showed no change compared to the same period last year. This outcome fell short of expectations for a slight increase and brought it closer to the deflationary level seen in July. The core CPI, which excludes volatile food and energy costs, rose by 0.8%, mirroring the August figure. Producer prices decreased by 2.5%, although the decline was slightly less severe than the previous month.

Zhaopeng Xing, a senior China strategist at the Australia & New Zealand Banking Group Ltd., commented on the data, stating that "September inflation data came out below consensus, suggesting a long way to go for the PBOC's fight against deflation." The Chinese government has introduced numerous counter-cyclical measures to boost domestic demand, but consumer confidence remains fragile.

While China's economy has shown signs of stabilization in recent weeks, concerns linger about the recovery due to issues like the ongoing property crisis and waning sentiment. During the recent Golden Week holiday period, Chinese consumers traveled and spent less than expected. Lukewarm home sales have also raised concerns about the need for further measures to bolster growth.

As a result of these concerns, Chinese stocks declined in early trading, with the Hang Seng China Enterprises Index losing as much as 1.9%. The onshore benchmark CSI 300 Index of stocks also fell nearly 1%.

Dong Lijuan, chief statistician at the NBS, suggested that the slower growth in food prices during Golden Week may have contributed to the flat CPI. She also mentioned a high base of comparison with last year as a reason for the CPI's lack of growth.

Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, emphasized the ongoing deflationary risk in China, stating that "CPI inflation at zero indicates the deflationary pressure in China is still a real risk to the economy." He added that the recovery of domestic demand remains weak without significant fiscal support.

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The government has considered raising its budget deficit for the year to spend more on infrastructure in an effort to stimulate the economy and achieve an official growth target of about 5%. Economists anticipate further measures, including a potential cut to policy rates, before the end of 2023. However, these actions may be constrained by future moves from the Federal Reserve. The U.S. has seen consumer prices rise, reinforcing the Fed's commitment to keeping interest rates high to combat inflation.

The IMF recently lowered its growth forecast for China, citing declines in real estate investment, housing prices, and weak consumer sentiment as key factors. Additional data expected next week, such as gross domestic product figures and indicators on retail sales, industrial output, and unemployment, will provide further insights into the state of China's economy in the third quarter.