Deflation in China gains momentum – News

Year-on-year core inflation, which excludes food and fuel prices, also showed a weak value of 0.6 percent, the same as in October, he writes Reuters.

According to Bruce Pang, chief economist at Jones Lang Lasalle, this statistic is a warning of persistent stagnant demand, the revival of which should be a priority for China if it wants its economy to show sustainable and balanced growth.

Even though consumer prices have been in deflation for two straight months, China’s central bank governor Pan Gongsheng said last week that he expects inflation to “pick up.”

Deflation is the opposite of inflation, meaning that goods and services become cheaper and money gains in value. In the short term, deflation can be beneficial for the economy: it will reduce commodity prices, stimulate spending by households and companies and thereby the entire economy, and create new jobs. However, if it takes longer, there is a problem.

“Merchants, distributors and manufacturers will get less money for their goods. However, their costs are usually increasing or, at best, stagnating. They will help themselves temporarily by cutting their profits, but this cannot be done indefinitely. This is followed by a reduction in costs, then production, wages, and employees, and if deflation lasts a long time and is deep, then it inevitably leads to the closing of businesses,” Citfin analyst Tomáš Volf recently explained to Novinkám.

In addition, the world’s second largest economy is also troubled by a weak industry, where producer prices are in long-term deflation. In November, they fell year-on-year for the 14th month in a row, while they continued to deepen, from 2.6 percent in October to a flat three percent. Here, too, economists expected a better result (2.8%).

The risk of teetering on the brink of deflation for a longer period of time is another of the many problems that the Chinese economy must face this year. In addition to the huge internal indebtedness or the crisis in the real estate market, China is still trying in vain to revive weak domestic and foreign demand. Chinese consumers are not spending and instead are tightening their belts because they are worried about how the economy will continue to develop.

On Tuesday, Moody’s also downgraded China’s rating outlook from stable to negative. She justified this precisely by lower economic growth in the medium term and problems in the real estate sector.

China’s Ministry of Finance described the decision as disappointing, saying the economy will bounce back from the bottom and current risks are controllable. The authorities will stimulate domestic demand and boost economic recovery next year, state media quoted the Politburo, the top decision-making body of the ruling Communist Party, as saying on Friday.