China’s consumer prices fell and factory-gate deflation continued in October, indicating challenges for the country’s economic recovery. The consumer price index (CPI) dropped 0.2% in October, driven by a decline in pork prices. Core inflation, which excludes food and fuel prices, also slowed. This persistent disinflationary trend raises concerns about China’s ability to meet its inflation target. Consumer prices slipped into deflation in July and returned to positive territory in August but remained flat in September. Factory deflation has persisted for the 13th consecutive month. These indicators suggest that a meaningful economic recovery is still out of reach.
Economists believe that Chinese policymakers need to implement more supportive measures to combat disinflation and prevent a decline in business confidence and household spending. Month-on-month, CPI fell 0.1%. The producer price index (PPI) also fell, with a 2.6% year-on-year drop in October. Authorities have downplayed the risks of deflation in China, but concerns remain due to a property crisis, local debt risks, and policy divergence with the West. Recent economic indicators have been mixed, with unexpected growth in imports but contraction in exports. The official purchasing managers’ index showed contraction in factory activity and slowing services activity. China also recorded its first-ever quarterly deficit in foreign direct investment, highlighting capital outflow pressure.
Moody’s expects China’s economy to grow by 5.0% in 2023, in line with the government’s target, but downside risks exist due to structural factors. The country has implemented measures to support the economy, including sovereign bond issuance and allowing local governments to frontload their bond quotas. However, the recovery process is complicated by various factors. Overall, the data indicates that China’s economic recovery is still uncertain, and policymakers need to take appropriate measures to address disinflation and stimulate growth.
