by Frank Tang in SCMP, Apr 15, 2023
China’s falling producer prices and slowing consumer price rises have triggered warnings about the risk of deflation and inadequate demand, the latest red alerts for the world’s second-largest economy at a critical juncture in its post-pandemic recovery.
The low-price environment puts Beijing’s policymakers in a much better position than their Western peers, who are busy dealing with high inflation and financial market turbulence, and allowed them to extend a record 10.6 trillion yuan (US$1.5 trillion) in bank credit in the first quarter of the year.
But analysts said uneven rebounds across sectors meant more forceful and targeted policies were needed to tackle two stubborn issues – repairing household balance sheets and restoring investor confidence – to put the economy back on track.
The risk of deflation was flagged in a recent speech by Liu Yuhui, a senior fellow of the Chinese Academy of Social Sciences, who warned that the “six pockets” – a metaphor for a typical salary-earning Chinese family’s total revenue – had been overdrawn.
The country’s contrasting economic parameters – weak consumer spending and a mere 0.7 per cent rise in the consumer price index (CPI) last month versus record high bank credit and money supply growth of more than 10 per cent since April last year – have been hot topics of discussion in Beijing academic and policymaking circles.
Although price levels could be a false alarm, given that year-on-year changes are a reflection of a high comparison base stemming from the Russian invasion of Ukraine early last year, many analysts and policy advisers warned that inadequate demand could undermine China’s economic recovery in the coming months and years.
A big rebound in economic activity is expected to be announced next week, when the National Bureau of Statistics releases first-quarter data, because the country abandoned its strict zero-Covid strategy after almost three years in December and has since reopened its borders.
The average estimate for China’s first quarter gross domestic product (GDP) growth by 16 domestic research institutions is 4.1 per cent – up from growth of 2.9 per cent in the previous quarter and 3 per cent for the whole last year.
But market concerns persist over the scale of China’s post-pandemic consumption rebound and the prognosis for exports amid a weak global recovery that has been battered by high interest rates and the United States’ banking crisis.
“The discussion of deflation is more like another way to express concerns about China’s economic downside risk,” said Lu Ting, Nomura’s chief China economist.
Two of China’s traditional drivers of economic growth – exports and consumption – are suspected to have lost steam, while investment, which contributed to a third of economic growth last year, has been curtailed by high debts.
The Chinese economy also faces long-term headwinds such as demographic challenges, and efforts to develop the digital economy and home-grown innovation have felt the impact of a US ban on high-end chip exports to China.
Research by Huachuang Securities on 20 major consumer categories found that half of them – including house rents, furniture and home appliances, domestic services, education and entertainment spending – had performed relatively weakly this year.
Spending on food and drink, medical care, telecoms services, subway transport, jewellery and watches was strong, according to its report, released last weekend, while spending on catering, clothing and shoes was rebounding quickly but with growth still lower than before the Covid-19 pandemic began in late 2019.
“So far, the Chinese economy is still in the stage of recovering from the pandemic hit,” said a government adviser who requested anonymity. “It’s not endogenous growth.”
He said he believed that deflation was not an issue bothering policymakers this year, estimating that the full-year reading could be around 2 per cent, lower than the government’s upper target of 3 per cent.
“Spending on consumer durables was low, as it is largely decided by people’s incomes and their future expectations … more should be done to improve household revenues and investor confidence,” the adviser said.
China’s massive market and consumption potential are major drawcards used by the top leadership to attract and retain business activity by multinational companies in the face of decoupling pressure from the US.
However, Chinese households’ concerns about income security and jobs have encouraged precautionary saving rather than the release of pent-up spending.
Household deposits increased by 9.9 trillion yuan in the first quarter, after adding 17.8 trillion yuan last year, according to data released by the People’s Bank of China on Tuesday.
A majority of research institutions estimated China would witness GDP growth of more than 5 per cent this year, with higher quarterly growth towards the end of the year, thanks to the low comparison base and Beijing’s extensive economic toolbox.
However, the recovery process remains a widely cited downside risk.
Although March exports rose a healthy 14.8 per cent, year on year rise, the weak prospects for global economic growth amid intense rivalry between Beijing and Washington could profoundly change the trade environment, foreign direct investment and the acquisition of technological know-how to fuel further growth.
Meanwhile, concerns have also risen about the sustainability of domestic growth in the latter half of this year if bank credit was front-loaded in the first few months.
Wang Xiaolu, deputy director of the Beijing-based National Economic Research Institute, attributed the low CPI growth to overcapacity and insufficient consumer demand, warning against monetary stimulus or large-scale investment.
“The Chinese economy will recover slowly, though not optimistically, in the coming quarters,” he said.
“It is necessary to return the basic regulatory function to the market. The government should focus on improving the business environment, ensuring fair competition, and giving the economy, especially private enterprises, time to recover.”
In the April edition of its global financial stability report, the International Monetary Fund (IMF) urged more actions to stabilise the Chinese property market.
The housing market, together with the upstream building materials and construction sectors and downstream home appliance sales, accounts for about a quarter of China’s GDP. It is also deemed financially and socially important because of concerns about social stability, the quality of bank assets and local government debt stress.
Proactive measures, such as relaxing home purchase restrictions, timely restructuring or resolution of the woes of troubled developers, and fiscal reforms, could help break the negative feedback loop between developer distress and sluggish home-buying demand, the IMF suggested.
“A robust mechanism to restore confidence in the real estate sector will be critical to limit risks of negative macro-financial spillovers,” it said.
Some economists say property is drawing more investment from Chinese households, offering another explanation for lagging consumer prices despite ample market liquidity.
Medium- and long-term household borrowing, a proxy for mortgage loans, fell 11.8 per cent year on year to 944.2 billion yuan in the first quarter, but the March figure jumped 70 per cent from a year earlier to 634.8 billion yuan.
https://www.scmp.com/economy/china-economy/article/3217047/risk-deflation-lacklustre-consumption-are-red-signals-chinas-path-economic-recovery
