Consumer Prices Continues to Fall

Minor deflation should resolve this year.

Deflationary risks persist in Mainland China as consumer price index (“CPI”) fell for the fourth consecutive month in January, marking an obvious decline. The National Bureau of Statistics reported a CPI fall of 0.8% for January following a 0.3% decrease in December.

With economic recovery remaining patchy, consumer consumption is plagued by weaknesses with low food, energy and car prices, especially pork prices which is a key component of the CPI basket and have been particularly volatile. The property market correction in Mainland China is still ongoing and weighs in significantly on consumer spending sentiment, furthermore high debt levels among provincial governments have dampened public investment and thus also affecting demand.

Besides the weak demand, economists have highlighted that the current deflationary situation is aggravated by supply-side factors, market distortions caused by too much supply and excessive production capacity.

There is the expectation that after Chinese New Year and for the rest of 2024, the massive inventories would decrease, with supply-side distortions eventually reconciling and prices normalizing.

On the demand side, reflation can be sped up with further government monetary, fiscal, employment and industrial measures in the forms of increasing money supply, tax and fee cuts, reducing reserve requirement ratio for financial institutions and other initiatives to boost business activities and demand, to further boost the momentum behind economic recovery.