“There is a bit of improvement of the inflation profile. In the meantime, the PPI deflation appears to be narrowing, pointing to a slow and moderate restoring process. In general, the inflation still points to weak demand and requires more policy support in the foreseeable future,” said Zhou Hao, chief economist at Guotai Junan International.
China’s consumer inflation fell in July, the first time since early 2021, with analysts warning about “low inflation” traps exacerbated by sluggish demand, which continue to haunt the underpowered economic recovery.
Beijing has repeatedly denied it has entered a period of deflation, which technically requires three consecutive monthly declines in consumer prices, even with CPI hovering just above zero since the beginning of the year.
In a report published last month, Chen Gong, founder of independent think tank Anbound, warned of the subdued demand behind the weak price figures.
“Insufficient demand is merely the external manifestation of China’s economic issues,” he said.
“The crux of China’s economic woes lies in structural problems, and simplifying these complex issues by solely focusing on inflation or deflation is an oversimplification.”
“Apart from the inevitable policy adjustments, it may be crucial to fundamentally maintain the direction of China’s development towards a market economy, adhering to the role of the market’s self-regulating mechanisms,” he said.
Analysts at Capital Economics said they were “sceptical that China was slipping into an extended period of deflation”.
“Consumer enthusiasm receded with the end of the summer holiday season. However, service consumption continued to provide support, while the real estate market remained sluggish,” China International Capital Corporation said earlier this week.
CICC said while there was a “slight improvement in infrastructure”, it had not stabilised yet and domestic demand remained relatively weak.
“Additionally, as external demand continued to slow down, the overall performance on the demand side remained subdued,” CICC said.
“Despite a lack of clear resurgence in demand, inventories in many industries remained relatively low. The expectations of stable growth also drove up industrial product prices.”