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While the Chinese economy has achieved its best performance since the emergence of the coronavirus pandemic, one measure has remained decidedly pessimistic.
Industrial production reached its highest growth rate in 2020, surpassing most of 2019. Consumption has recovered and exports are booming, up 21% in November. But in the same month, the country’s consumer price index fell into negative territory for the first time in over a decade.
The overall rate of minus 0.5 percent was mainly attributable to pork, a crucial part of the basket of goods and services used to determine the price level. Pork prices increased considerably last year, as African swine fever swept through Chinese herds, but recently started to decline, pushing overall price growth into negative territory.
But even when food and energy are stripped, China’s core inflation has remained at 0.5% over the past five months – its lowest level since 2010, and a conundrum given that the China knows the world strongest rebound of the coronavirus pandemic.
The continued weakness in Chinese prices indicates subdued household demand and poses a challenge for the People’s Bank of China as it attempts to manage the recovery in other areas of the economy, analysts said.
“With this kind of strength in economic activity, there should be more pressure on prices,” said Dariusz Kowalczyk, an economist at Credit Agricole, who stressed that the industry is growing faster than it is. was before the pandemic.
Although retail have increased year-over-year since August, increasing 5% last month, subdued inflation data suggests households have limited appetites to spend.
“We believe that low inflation is not only due to low food and oil prices, but also because there is still some weakness on the demand side,” Jingyang Chen said, economist at HSBC. She added that China “is still in the midst of an uphill battle to achieve a full recovery in domestic demand.”
Unlike many western economies, China has took limited action to support household spending, and instead focused on supply-side measures to stimulate its economy, combined with a strict approach to virus prevention that limited new reported cases to a trickle.
“[The government] orchestrated and managed a rapid recovery in industrial production, and as a result we have had this overhang of supply which does not match demand, so unsurprisingly, prices must be low, ”Kowalczyk said.
There are a few caveats about the price data. Interpretation is more difficult than usual due to changes in household behavior during the pandemic, especially with regard to the basket of goods and services they consume. Expenses for services such as travel and tourism has increased recently, for example, but remains depressed compared to last year.
And not all prices are low.
China’s Producer Price Index, which measures prices leaving the factory, has been in negative territory since February on an annual basis. But it rose month over month in November, suggesting that the contraction is easing thanks to export growth, which relies on consumption in the west, where government support has been stronger.
Chinese stock market exploded this year and the prices of new homes have risen sharply. Concerns about leverage have already surfaced real estate sector, where the government took steps to limit borrowing. These are starting to have an effect: in November, new home prices rose 4% year-on-year in major cities – the slowest rate in nearly four years. China’s CPI measure does not directly include home purchases, but partially includes the cost of renting.
Another positive point is the improvement in the labor market in China, which could help boost inflation in the coming months. In November, the unemployment rate fell to the same level it was in December 2019, before the pandemic hit. This could lead to a recovery in consumer and consumer confidence, supporting prices.
But Ms. Chen said income growth remained uneven: “A lot of people just focus on the average growth in disposable income in China, but if you take a look at migrant workers [income] growth, they are still lagging behind.
The country million migrant workers, which is not fully reflected in official unemployment data, were hit hard by travel restrictions and lockdowns earlier this year.
Negative inflation puts pressure on businesses and households by raising real interest rates and threatening to undermine profitability. And while many expect rate hikes to start next year, some suggest price stagnation could push the PBoC to hold or even cut rates.
Haibin Zhu, chief China economist at JPMorgan, argued in a December report that “macroeconomic and inflation dynamics point in different directions” and that the PBoC is likely to cut rates in 2021. He says that financial markets have “focused too much on hard data”.
But the central bank should be cautious in considering easing monetary policy amid a strong recovery.
“The rate cut can send a misleading message of policy easing,” Zhu said. “This is something the PBoC doesn’t want to mis-communicate with the market.”
Additional reporting by Wang Xueqiao in Shanghai
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