China Recovery Slows as Deflation Risk Rises

China’s consumer prices were flat in June and producer prices fell further, a worrisome sign of a slowing post-pandemic recovery for the world’s second-largest economy. 

The country’s consumer price index (CPI) was unchanged year-over-year in June after a 0.2% increase in May, according to data released Monday by China’s National Bureau of Statistics. Producer prices were down 5.4% from a year before, the fastest decline since December 2015, Bloomberg reported.

“The risk of deflation is very real,” Pinpoint Asset Management Chief Economist Zhang Zhiwei told Bloomberg. Deflation, the opposite of inflation, can signal a contraction of the economy.

Consumer inflation was driven down by falling pork prices. Pork prices fell in June 7.2% compared to the previous year. In May they dropped year-on-year by 3.2%. Producer prices, which is what factories charge wholesalers, are down due to lower commodity prices and depressed demand domestically and internationally, according to Bloomberg.

Analysts from Nomura, the Japanese investment bank, predict that the country’s CPI will drop 0.5% in July but rise 0.3% overall in 2023 — far below Beijing’s 3% target, according to the South China Morning Post.

“It’s very unlikely for the government to introduce extraordinarily strong macro policies,” Jones Lang Lasalle Chief Economist Bruce Pang told Bloomberg. 

Instead, the country will turn to smaller, focused efforts to stimulate the economy. 

China Premier Li Qiang told Chinese economists last week that potential policies would be “targeted, comprehensive and well-coordinated," Bloomberg reported.