China’s consumer price drop worsens, fuelling deflation fears

China’s central bank has said it is now worried about “temporary” deflation pressures, but it will not help government measures to boost the economy and encourage investment in the beleaguered property sector. The value of new home sales among China’s 100 biggest developers fell 29.6 per cent on-year in November.

Ratings agency Moody’s last week downgraded China’s credit rating, citing high government debt and the property crisis.

So far, the economic headwinds have not dampened Chia’s appetite for Australia’s top export commodity – iron ore.

A key meeting of Mr Xi’s top policymaking committee called the Politburo on Friday pledged to step up fiscal support “appropriately”. Mr Xi said the country’s economic recovery was still at a “critical stage”, according to state news agency Xinhua.

“China’s development is facing a complex situation, with more unfavorable factors in the international political and economic environment and a combination of cyclical and structural problems at home,” Mr Xi said.

China has been cutting interest rates and issuing more government bonds, providing a glimmer of hope to the debt-laden property sector. Economists interpreted comments from the Politburo meeting pledging “proactive” fiscal policies as positive for the economic outlook despite the lack of detail.

“The tone of the readout was dovish, emphasising the need to do more to stabilise the economic situation. This suggests that more policy support is on its way, especially from fiscal policy, which will be intensified,” Capital Economics said in a note.

The meeting did not set a target for next year, although some economists now believe it could as a high as 5 per cent – the same level of growth Beijing hopes to achieve this year despite the huge challenges. Citigroup’s economists said after the meeting they expected a GDP target of “around 5 per cent” next year.

Price supports

However, the latest CPI numbers may dampen that sentiment.

China’s unemployment has also been rising. While exports recovered slightly in November, rising 0.5 per cent, they are still weak compared with historic figures.

Despite this, China’s demand for the steel-making commodity iron ore has not diminished. Iron ore prices have risen 33 per cent since August, boosting the share prices of miners like Rio Tinto and BHP Group. Iron ore imports rose 3.4 per cent in November from the month before, Customs data shows.

The weak CPI figures have been partly due to slumping pork prices. An ample supply of hogs and sluggish consumption have weighed on the market, prompting the government to take steps to support prices. The meat has a large share in China’s CPI basket due to its popularity among local diners.

A measure of core CPI that strips out volatile food and energy costs rose 0.6 per cent on-year in November, repeating the previous month’s performance.

China has set an annual inflation target of around 3 per cent this year, which it is nearly certain to miss. Economists have mixed views on the outlook for 2024, with some arguing that consumer prices could grow at a pace of around 1 per cent as sentiment improves, and others arguing deflation will persist into the first half.

Proactive fiscal stimulus will be a vital part of China’s policy objectives next year, according to Bruce Pang, chief economist for greater China at Jones Lang LaSalle. The measures will “have to strike a balance between juicing investment and consumption, and capping debt risks of local governments”.

With Bloomberg