In March, China’s consumer prices experienced only a slight increase compared to the previous year, a trend that diverged from economists’ expectations and underscored the ongoing challenges in reviving domestic demand within the world’s second-largest economy.
While the threat of deflation appears to be gradually dissipating, the persistent property crisis continues to cast a shadow over both consumer and business sentiment, posing significant hurdles to China’s economic recovery efforts.
Official data released on Thursday indicated that China’s consumer price index (CPI) for March recorded a modest 0.1% uptick compared to the previous year. However, this increase fell short of economists’ projections, which had anticipated a more substantial rise of 0.4%. Moreover, it marked a decline from the 0.7% increase observed in February, signaling a subdued trajectory in consumer price inflation.
Commenting on the subdued CPI figure, Lynn Song, Chief Economist for Greater China at ING, emphasized that while China may not be entrenched in a deflationary spiral, inflation remains below the desired target. She noted that while low inflation levels theoretically allow for monetary policy easing, policymakers may exercise caution due to concerns about maintaining stability in the Renminbi (RMB) exchange rate, potentially tempering the appetite for aggressive interest rate cuts.
The modest CPI growth comes against the backdrop of a mixed set of economic indicators in the first quarter. Despite signs of expansion in factory activity during March following a six-month contraction period, the producer prices index (PPI) exhibited a decline of 2.8% compared to February. This decline underscores the persistent deflationary pressures prevalent within China’s manufacturing sector, posing challenges to cost dynamics and profit margins for producers.
In a notable development, Fitch, a leading US-based credit rating agency, revised its long-term outlook on China to negative while maintaining its A+ credit rating. The agency cited China’s strategic shift away from growth predominantly driven by the property sector as a key source of heightened uncertainty. This strategic pivot introduces significant challenges and risks, contributing to Fitch’s cautious outlook on China’s economic trajectory.
Additionally, Fitch projected a rise in the general government deficit to 7.1% of GDP in 2024, the highest level since 2020. This forecast reflects the anticipated impact of China’s stringent COVID-19 containment measures, which have necessitated substantial fiscal support and contributed to fiscal imbalances.
China’s economic slowdown, particularly evident in the real estate sector amid a significant debt crisis among property developers, has substantially dampened consumer sentiment, notably impacting the housing market, which historically serves as a cornerstone of China’s economic growth model.
Despite these formidable challenges, China has set an ambitious economic growth target of around 5% for the current year. However, achieving this target will require concerted efforts to navigate the complex economic landscape, address structural imbalances, and restore investor confidence. Additionally, policymakers must remain vigilant in managing risks associated with the property market and external uncertainties to ensure sustainable and inclusive growth in the coming years.