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BEIJING, China: As it struggles to increase demand, China’s consumer sector has entered a deflationary period, while factory-product prices continued declining in July, placing more pressure on Beijing to release more direct policy stimulus.
In contrast to the rising inflation in other countries, the world’s second-largest economy is beginning an era of much slower economic growth, described as similar to Japan’s “lost decades” when consumer prices and wages stagnated.
After a rally in the first quarter of 2023, China’s post-pandemic recovery has slowed, with demand at home and abroad weakening and the failure of a series of policies aimed at supporting the economy.
National Bureau of Statistics (NBS) data released this week reported that in July, the consumer price index (CPI) dropped 0.3 percent year-on-year, the first decline since February 2021.
Since Japan’s last negative headline CPI reading in August 2021, China is the first G20 economy to report a year-on-year decline in consumer prices, raising concerns about negative effects to business transactions between major trading partners.
“It shows China’s slower-than-expected economic rebound is not strong enough to offset the weaker global demand and lift commodity prices,” noted Gary Ng, Asia Pacific senior economist at Natixis, as quoted by Reuters.
Adding to reports about more debt issues in China’s property sector, Recent trade figures showed exports and imports both declining in July.
As a result, despite lower interest rates, consumers and companies are hoarding cash, rather than spending or investing.
Xia Chun, chief economist at Yintech investment holdings in Hong Kong, said China’s deflation will last for six to 12 months, but will not follow Japan’s history, where price stagnation has persisted for much of the past two decades.
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