The consumer price index, the main gauge of inflation, fell 0.3% in July, the National Bureau of Statistics of China (NBS) said, having flatlined in June. A survey of analysts had anticipated a 0.4% year-on-year decline, according to the Guardian.
July’s data was China’s first negative inflation reading since early 2021, when prices were weaker as the COVID-19 pandemic hit demand, and pork prices fell.
Separate figures released on Tuesday showed the country’s imports and exports fell more sharply than expected last month, amid waning global demand for Chinese products.
Retailers in China have been hit by a slowdown in sales. Businesses that stocked up on goods in expectation of a surge in demand after pandemic restrictions were lifted are now under pressure to cut prices.
The cost of cars has also fallen after Tesla triggered a price war in China’s electric vehicle market by reducing its prices.
Falling food prices also pulled down the cost of living. China’s core inflation rate, which strips out food and energy costs, rose to +0.8% year on year, up from +0.4% in June.
The country’s factories are already charging less for their goods, as they react to weakening demand after commodity prices fell. China’s producer price inflation, which tracks prices at the factory gate, was -4.4% in July, after a 5.4% year-on-year drop in June.
The Chinese economy’s slide into deflation is expected to lead to more calls for government stimulus, as Beijing also tries to address weakening trade activity and the slowdown in China’s property sector.
Analysts said the drop in Chinese inflation rates could help to ease price pressures in the west. Deflation in China “should help inflation in the US and Europe to moderate”, said Ding Shuang, the chief economist for greater China and north Asia at Standard Chartered bank.
But Tom Hopkins, a portfolio manager at BRI Wealth Management, said the data was a clear sign that the Chinese economy was weakening, which would spark concern for EU companies and economies for whom China was a key trading partner.
“China moving into a deflationary state bucks the trend of most western nations, which have been struggling with the opposite problem of high inflation,” Hopkins said.
Authorities have played down concerns about deflation. Liu Guoqiang, a deputy governor of the China’s central bank, last month said there would be no deflationary risks in China in the second half of the year, but noted the economy needed time to return to normal after the pandemic.
The Chinese government has set a consumer inflation target of about 3% this year.
The NBS predicted inflation would pick up in coming months, with its chief statistician, Dong Lijuan, saying: “With the impact of a high base from last year gradually fading, the CPI is likely to rebound gradually.”
Despite recent policy stimulus, consumers and manufacturers remained cautious amid the still-weak housing market, high youth unemployment and a diminishing appetite among foreign firms to invest in China.
The Chinese economy also has strong impacts on Vietnam due to the high bilateral trade. Though the neighboring economy has slowed somewhat this year, China still has much room for its fiscal and monetary manoeuvre to attain an economic growth rate of around 5% this year. The second half will likely see acceleration in the Chinese economy following slowdown in the first half.
Vietnam's real GDP grew by 8.0% in 2022, as the economy rebounded strongly from the economic disruption caused by the COVID-19 pandemic during second half of 2021. However economic growth momentum moderated to 3.3% y/y in the first quarter of 2023, reflecting the impact of weakening growth in industrial production and exports.
Vietnam's goods exports rose by 10.6% in 2022. However, the economic slowdown in the US and EU, which together account for 42% of Vietnam's total goods exports, has resulted in a significant weakening in exports during the first four months of 2023, with Vietnam's total goods exports declining by 13% y/y.
Exports to mainland China also showed a significant decline, falling by 12.9% y/y in the first four months of 2023. Exports of computers, electrical products and components as well as mobile phones to mainland China fell by 14.9% y/y in the January-April 2023 period.
