For the first time since 2021, both consumer and producer prices in China have fallen, indicating deflation as demand in the world’s second-largest economy falls. The consumer price index fell 0.3% in July compared to the same period last year, according to the National Bureau of Statistics (NBS). Analysts contend that decreasing domestic consumption is still weighing on the country’s post-Covid economic recovery, despite Bloomberg’s prediction of a 0.4% decline. Meanwhile, the Producer Price Index, which measures the change in selling prices paid by domestic producers for their production, declined by 4.4 percent in July, exceeding economists’ expectations of 4.1 percent.
Deflation has the potential to multiply
Following the release of the reports, the Shanghai Composite fell 0.29 percent and the Shenzhen Component fell 0.21 percent. The Hang Seng index in Hong Kong fell 0.42 percent. The NBS report comes a day after it was disclosed that Beijing’s exports slid at their fastest rate in more than three years last month, raising alarm bells. Furthermore, imports fell for the eleventh consecutive month as customers refused to spend on items. Deflation has the potential to multiply. Although some may view a price drop as a good indicator of increased purchasing, consumers frequently postpone purchases in anticipation of more price reductions.
Because of the drop in demand, companies were obliged to cut production, halt hiring, or even lay off some employees. They are forced to agree to new discounts in order to sell off their stocks and maintain some profitability while costs stay constant. Despite the dismal economic indicators, there appears to be no signal from the Politburo of a big-bang boost. Morgan Stanley lowered China’s rating to ‘equal weight’ last week, while India’s was upgraded to ‘overweight’. Simply put, an ‘overweight’ rating means that the brokerage firm believes India will do better in the future. “We think returning India to an ‘overweight’ rating and downgrading China to ‘equal weight’ is warranted,” analysts said, referring to Indian markets’ outperformance over China as a sign of a structural breakout in favor of New Delhi.
