Risk of deflation, lacklustre consumption are red signals on China’s path to economic recovery
- Weak consumer spending amid record high bank credit a puzzle for Beijing policymakers
- Big rebound in economic activity expected to be announced by National Bureau of Statistics next week
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.
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.