China faces no deflationary risk as demand, confidence recover

BEIJING - Despite challenges at home and from abroad, China's economy has sustained growth momentum with market demand and business confidence moving on a recovery trajectory, laying no ground for deflationary risk, experts have said.

The country's consumer price index (CPI), a main gauge of inflation, logged a 0.3 percent year-on-year decline in July, after coming in flat in June compared with the same period of last year.

Chinese authorities, economists and analysts said the current low price level is temporary, and its impacts should not be exaggerated.

A closer look at the July CPI data released by the National Bureau of Statistics (NBS) on Wednesday suggests that the decline in annual terms will likely prove a short-term phenomenon.

The NBS statistician Dong Lijuan attributed the decline to a high base in the corresponding period of 2022.

The food prices decreased by 1 percent year-on-year, dragging down the CPI by about 0.18 percentage points. The food price decline was mainly due to the abundant supply of pork, China's staple meat, as well as seasonal fruits and vegetables on the market.

It's worth noticing that the core CPI, which deducts food and energy prices, rose 0.8 percent year-on-year, with the pace of increase widening by 0.4 percentage points compared with that in June.

The rebound of core CPI indicates that the current domestic demand is stabilizing and recovering, said Wen Bin, the chief economist of China Minsheng Bank, in a co-authored note.

On a monthly basis, the country's CPI rose 0.2 percent, reversing the 0.2 percent decline registered in June. It was also the first time China's CPI reported a monthly increase since February this year, demonstrating positive prospects.

The decline of CPI is almost entirely due to the impact of food supply release, while demand indicators, such as core commodity CPI and core service CPI, rebounded strongly, said Tu Qiang, a macro analyst at Shenwan Hongyuan Securities, in a co-authored note.

The low reading of CPI due to supply factors cannot conceal the fact that demand has recovered strongly, and CPI may start a round of recovery in August, Tu added.

Liu Guoqiang, deputy governor of the People's Bank of China, said in mid-July in response to the country's softening price growth that "we don't see deflation at present and there will not be a deflationary risk in the second half of this year either."

Gauged by short-term indicators, the recovery of China's domestic demand in recent months slowed down from the first quarter as insufficient market demand and tepid endogenous impetus remained a drag on growth.

Chinese authorities have acknowledged the difficulties and pledged more efforts to bolster the economy.

A slew of policy commitments, targeting specific sectors ranging from consumption, private economy and the property market to the capital market and forex market, have been made public after a key meeting of the top leadership vowed to strengthen counter-cyclical regulation and make more policy options available.

To encourage consumption, which the government said plays a fundamental role in driving economic growth, the National Development and Reform Commission released a 20-point plan last week to spur consumer spending on a wide range of goods and services, including new energy vehicles, home appliances, electronics, catering and tourism.

Liu emphasized that it takes time for consumption to return to normal. It has only been about six months since China adjusted its COVID-19 response, and positive signs have emerged already in areas including economic circulation, residents' incomes and consumption, Liu said.

Business confidence has gradually been restored following policy support for the private economy and investment.

China's small and medium-sized enterprises (SMEs) continued their recovery momentum in July, data from the China Association of Small and Medium Enterprises showed.

The SME development index gained 0.2 points to 89.3 last month. Six of the eight sub-indices, including those for the real estate, social service, transport and catering sectors, rallied.

The Chinese economy has recovered steadily, with M2, a broad measure of money supply that covers cash in circulation and all deposits, maintaining a relatively sound growth, which is obviously different from the typical deflation in history, Liu said.

While facing challenges, China's economy expanded 6.3 percent in the second quarter of the year, accelerating from 4.5 percent in the previous quarter. It grew 5.5 percent in the first half of the year, exceeding the government's target of around 5 percent set for 2023.

The M2 climbed 11.3 percent year-on-year to 287.3 trillion yuan at the end of June.

The experts forecast a rise in consumer prices in the next stage as the pro-growth policy mix gradually makes a positive impact.

Real estate completion and service consumption will drive up core CPI, Tu said.

With sustained economic recovery, steady market demand expansion, continuous improvement of supply and demand, and gradual elimination of the impact of the high base in the corresponding period of last year, the country's CPI is expected to gradually rise, Dong said.