China faces a swath of economic challenges that could hamper its economic growth, starting from a seemingly unstoppable deflationary wave.
China’s consumer prices missed market expectations in June, worrying economists about the state of the world’s second-largest economy. Producer prices in June were in line with market forecasts but still dipped into dangerous deflationary territory.
The Consumer Price Index (CPI) rose 0.2% in June instead of the 0.4% expected by Bloomberg-polled economists. Core inflation, a measure that excludes volatile food and energy prices, rose 0.6% vs 0.7% expected.
Inflation in May jumped 0.3%, slightly more than June’s monthly increase. Any reading below 2% is considered deflation territory by most of the world’s central banks. 2% is usually the target for stable and healthy growth without pressuring consumers.
Headline inflation was particularly affected by falling food prices. Vegetables and fruit fell by 7.3% and 8.7% respectively, while beef dropped by 13.4%. Pork prices surged by 18.1% on the backdrop of possible tariffs against European pork imports.
On the other hand, the Producer Price Index (PPI) dropped 0.8%, in line with expectations. Although better than the 1.4% fall measured in May, the PPI also remains in deep deflationary territory.
“The risk of deflation has not faded in China. Domestic demand remains weak,” Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, said.
Export-driven growth
With deflation ramping up, domestic demand weakening, and a crippling real estate crisis, China’s economic growth currently relies exclusively on exports.
China’s exports have consistently beaten expectations this year, driving a better-than-expected GDP growth in the first quarter. By keeping this pace, the International Monetary Fund believes China will reach its self-defined 5% GDP growth goal.
However, exports from the world’s largest manufacturer may slump in the following months and years. Both from internal and external pressures.
Internally, deflation and the weakening of Chinese consumers are slashing industrial production. Manufacturing and services output is contracting, hampering exports in the short and medium term.
Externally, Western economies (the main receivers of Chinese goods) are raising barriers against Beijing fearing an overproduction of strategic products. The United States raised tariffs against Chinese goods up to 100%, with the European Union implementing duties on China’s electric cars.
Even developing economies more reliant on Chinese products are turning their backs on Beijing. Brazil, Mexico, and even nearby Indonesia are raising trade barriers against Chinese exports to protect their domestic industries.
The Chinese government is expected to implement strong measures to revive internal demand. Some policies could be announced as early as next week, during the Chinese Communist Party’s third plenum session.
