China's weak inflation and weak trade data have raised concerns that the world's second largest economy still has an unstable chassis, despite recent signs of stabilization.
Consumer prices unexpectedly remained flat in September after rebounding in August, indicating weak demand and limited effectiveness of the Chinese government's recent efforts to support the economy. According to official data released last Friday, exports also continued to shrink last month, but the contraction was narrower than in August.
Although there have been signs in recent weeks that the Chinese economy may be recovering after experiencing a slowdown in summer growth, the latest batch of data mentioned above reminds people that the Chinese economy is still suffering from several major unfavorable factors and its prospects should be viewed with caution.
The prolonged real estate crisis continues to affect the Chinese economy, and the possibility of a major Chinese developer defaulting is increasing, sparking a new round of concerns among global investors. After three years of lifting anti epidemic restrictions, there has been a long-awaited recovery in consumer spending, but it has proven to be just a flash in the pan. In addition, with the cooling demand for Chinese products in overseas markets, exports are expected to drag down economic growth for the rest of this year.
The new concerns surrounding China's recent prospects in recent weeks have dimmed hopes of a global economic improvement, especially as interest rate hikes by European and American central banks have curbed consumer and corporate spending and investment willingness.
The International Monetary Fund (IMF) last week lowered China's economic growth expectations for this year and the next two years from its July forecast of 5.2% and 4.4%, respectively, to 5% and 4.2%. The downward revision of China's economic expectations has also prompted the IMF to lower its global economic growth forecast for 2024 from 3% to 2.9%.
Some economists suggest that this pain may only fully manifest later. Tommy Xie, head of China research at Overseas Chinese Bank (OCBC) in Singapore, predicts that even without large-scale stimulus measures, the Chinese economy will reach the official set growth target of around 5% this year.
Xie Dongming said that the Chinese economy is likely to rebound further in the coming months, but the real challenge will come next year and the year after.
One of the challenges will be to resist spiral deflation, which is an unfavorable situation where price declines and weak demand reinforce each other.
Earlier this summer, China was shrouded in the shadow of this spiral of deflation, when overall consumer prices fell into deflation for the first time in more than two years in July.
Last Friday, official data from the National Bureau of Statistics of China showed that the Consumer Price Index (CPI) for September remained unchanged year-on-year; August saw a 0.1% increase. Economists surveyed by The Wall Street Journal had previously expected the CPI to rise by 0.2% in September.
Some economists are optimistic that deflationary pressure will dissipate after a period of time. The core inflation rate, excluding volatile energy and food prices, remained at a six month high of 0.8% in September.
Capital Economics economists told clients last Friday that this indicates that low inflation rates are not entirely due to weak domestic demand. The research institution believes that the weak prices are also due to excessive inventory caused by strong factory production during the pandemic in China.
In September, the factory price index (PPI) of industrial producers decreased by 2.5% year-on-year, slowing down from the 3% year-on-year decrease in August. Economists at Goldman Sachs wrote that part of the reason for this difference is the rise in crude oil prices. Unlike consumer prices, China's demand for metals, chemicals, and energy has been affected by the continued downturn in real estate, in which case PPI deflation has been ongoing for nearly a year.
At the same time, the monthly trade data released last Friday provided some evidence that the Chinese economy may start to rebound from a bottom.
According to data from the General Administration of Customs of China, China's exports of goods to other regions of the world decreased by 6.2% year-on-year in September, narrowing the decline of 8.8% in August. Imports in September also decreased by 6.2% year-on-year, lower than the 7.5% decline in August.
Xie Dongming from Overseas Chinese Bank said that the unexpected resilience of the US economy has helped alleviate the impact of a slowdown in overseas demand for manufactured goods in China.
Nevertheless, as Western consumers shift their spending from goods to services, it is expected that exports will drag down the overall growth this year, in sharp contrast to the rare growth pillar of exports during the COVID-19 epidemic.
Last Friday's data release comes as economists are discussing whether China's summer economic slowdown has completely become a thing of the past. In recent weeks, economic data has shown some signs of stabilization.
In September, an official indicator of manufacturing activity expanded for the first time since March. At the beginning of this month, during the eight day Mid Autumn and National Day holiday, the number of domestic tourists in China exceeded the same period in 2019, the last year before the epidemic, but the growth rate was lower than expected.
China will release a series of economic indicators on Wednesday, including its gross domestic product (GDP) for the third quarter.
With a series of less gloomy data being released recently, some investment banks have cautiously raised their expectations for economic growth in the third quarter.
Last Thursday, Citi economists raised China's third-quarter economic growth forecast to 4.3%, and the Chinese economy is expected to return to the track of achieving its annual growth target of around 5%. Nomura recently raised its expected annual GDP growth rate in China from 4.6% to 4.8%.
Analysts believe that the recent series of easing measures taken by the Chinese government are the reason for investment banks to raise their expectations. The People's Bank of China has lowered interest rates multiple times this year, and local governments have also accelerated bond issuance to fund infrastructure projects.
In response to the real estate crisis, officials in more cities have lifted residential purchase restrictions. In some cases, they have begun to allow developers to offer greater discounts to digest inventory of residential properties for sale.
However, economists generally believe that these measures are just a drop in the bucket and cannot achieve a lasting recovery of confidence. Many people believe that confidence is a key factor missing in the economic recovery.
An imminent risk comes from the embattled real estate industry. Country Garden, one of China's large real estate developers, has failed to repay a loan of $60 million and stated last week that it may default on nearly $190 billion in debt.
Some economists have stated that the Chinese government has also done almost nothing to address structural adverse factors, such as rapidly aging population and slowing productivity growth, which will put pressure on China's long-term growth potential.
Ding Shuang, Chief China Economist at Standard Chartered Bank, said that the recovery momentum after the epidemic is not as strong as expected and there is little sign of confidence improving.