China recently experienced an increase in consumer prices for the first time in six months, a change driven by spending associated with the Lunar New Year. This development signals a slight relief for the Chinese economy, which is the second-largest in the world, but has been struggling with low consumer confidence.
Concurrently, prices at the factory level, known as factory-gate prices, continued their downward trend, highlighting the ongoing economic challenges China faces.
The increase in the consumer price index (CPI) was noted at 0.7% on a year-over-year basis for February, according to data from the National Bureau of Statistics. This rise exceeded the projections of economists, who had anticipated a more modest increase of 0.3%.
Notably, this growth in consumer prices is the most significant in 11 months, driven largely by price hikes in essential food items such as pork and fresh vegetables, and increased travel expenditures during the Lunar New Year.
The rise in the CPI in February marks a noticeable turnaround from January, when the index fell by 0.8%, the sharpest decline observed in over 14 years. This earlier drop was partly attributed to a higher comparative base in January 2023, when Lunar New Year festivities occurred earlier, boosting spending during that period.
Despite recent signs of improvement in certain areas of the economy, such as unexpectedly strong trade figures, analysts caution that a full-fledged economic recovery is not yet a certainty.
Zhiwei Zhang, a leading economist, emphasizes that it's premature to declare the end of deflationary trends in China, pointing to ongoing weakness in domestic demand and the unsettled nature of new apartment sales.
In February, the month-on-month increase in the CPI was recorded at 1.0%, surpassing the 0.3% rise seen in January and exceeding the 0.7% growth anticipated by economists. In contrast, the producer price index (PPI), which tracks changes in the prices received by domestic producers for their goods, fell by 2.7% compared to the previous year, indicating a faster decline than the 2.5% forecast.
A primary concern for China's economy is the ongoing risk of deflation, largely due to persistently weak demand. This is evident in the combined data for January and February, showing no year-over-year change in the CPI, with food prices decreasing by 3.4% and non-food prices dropping by 0.9%.
The Chinese economy has faced numerous challenges over the past year, including a significant debt crisis among property developers, which has severely impacted consumer confidence in home-buying and affected a key sector of the economy.
Other factors contributing to slower economic growth include weaker international trade, reduced domestic investment, and high debt levels among local governments. In response, Chinese policymakers have pledged to implement new measures to stimulate economic growth.
The governor of China's central bank has indicated the possibility of further reducing the reserve ratio requirement (RRR) for commercial banks, following a substantial 50 basis point cut in January, the largest reduction in two years.
Meanwhile, Premier Li Qiang has announced an ambitious economic growth target of around 5%. However, reaching this target may prove challenging as the post-COVID economic recovery loses momentum. The International Monetary Fund predicts China's growth will slow to 4.6% this year, down from 5.2% the previous year.
Additionally, Premier Li has set an inflation target of 3% for 2024, aligning with the targets that have been in place since 2015. Last year, consumer prices increased by only 0.2%, falling short of the government's target.
Economists at UBS predict only a modest recovery in both CPI and PPI inflation, cautioning that a deeper downturn in the property market may pose greater risks of deflation.
09.03.2024
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