China’s economy is just starting to taste recovery, but a sharp drop in inflation has once again sparked fears of deflation. The manufacturing-led recovery has exacerbated trade tensions abroad.
In response to a weakening economy, the Chinese government has stepped up efforts to consolidate China’s advantages as the world’s factory. Investment is pouring into manufacturing, particularly in areas such as electric vehicles and green energy equipment. As a result, industrial output improves.
Against this background, economists at Goldman Sachs, Morgan Stanley and the Asian Development Bank this week raised their forecasts for China’s economic growth this year. All three organizations now expect full-year economic growth to be close to the Chinese government’s official target of around 5%.
However, inflation data released on Thursday still show that China’s economic recovery is uneven. While the Chinese government has had some success in stimulating growth through manufacturing, many economists say officials also need to do more to boost consumer spending.
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China’s tendency to stimulate the supply side of the economy has caused ripples abroad. Data released on Thursday showed that China’s industrial producer prices fell for the 18th consecutive month in March, down 2.8% year-on-year, as the expansion of production capacity outstripped demand.
Prices for Chinese products such as cars and electronics are falling, and while that could be a boost for consumers after years of high inflation, governments worry that generous support from Beijing threatens to allow Chinese rivals to undercut local companies to employment and industry.
When US Treasury Secretary Janet Yellen met with senior Chinese officials this week, she urged Beijing to stop relying on exports and instead adopt measures to boost consumer spending to ensure more balanced economic growth. He warned that investing in popular areas such as electric vehicles, battery technology and photovoltaics creates a deficit in global markets.
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“China is now too big for the rest of the world to absorb this enormous capacity,” Yellen said in Beijing on Monday. “When the global market is flooded with artificially low-priced Chinese products, the viability of the United States and other foreign companies is at stake.”
The drop in consumer price inflation in China is in stark contrast to the United States, where price growth last month was higher than expected, undermining expectations for an interest rate cut by the Federal Reserve. Data released on Wednesday showed that US consumer prices rose 3.5% year over year in March.
Inflation in China was generally weak in March. Data showed that price growth for services, food and consumer goods had all slowed. After excluding volatile price factors such as food and energy, core consumer price inflation slowed to 0.6% from the previous 1.2%.
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China’s economy grew 5.2% last year and grew only 3% in 2022, when many major cities went into lockdown to prevent and control the new crown epidemic, which affected economic activities.
Forecasters including the International Monetary Fund (IMF) expect China’s economic growth to hover around 4% in the coming years, down from 6% to 7% in the years before the COVID-19 pandemic. China’s economy is currently grappling with serious challenges such as the bursting real estate bubble and an aging and shrinking workforce.
Eswar Prasad, a professor at Cornell University and former China director of the International Monetary Fund, said: “The Chinese economy continues to face deflation, highlighting short-term weaknesses and structural weaknesses.”
Deflation is a damaging economic problem. Falling prices tend to exacerbate weakness in consumer spending as people delay purchases thinking they’ll get a better deal later. Weaker spending means lower corporate profits, which could have knock-on effects on employment and income. As incomes shrink, debt burdens will become even heavier.
China’s central bank has cut interest rates and the government has pledged to increase financial support this year to support economic growth and prevent deflation from solidifying. Many economists say the Chinese government may continue to take stronger measures, such as further reducing borrowing costs or cutting taxes or “spreading money” to stimulate consumer spending.
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Economists at Capital Economics said they expected inflation to rise to some extent but would remain around 0.5% on average over the next few years as the Chinese government prefers to increase supply rather than spending, which would have a negative impact on the economy Prices are causing pressure. “Policy support is unlikely to resolve the imbalance between investment and consumption behind China’s low inflation, which we believe will become a long-term phenomenon,” they wrote in a note to clients.
(update completed)
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