Pressure on the Chinese government to revive the economy

Consumer prices in China continued to fall in January, recording the sharpest decline in 14 years, according to official data released yesterday, putting pressure on the Beijing government to adopt more aggressive measures to revive the country's economy. , according to AFP.

Chinese officials have struggled for months to shore up economic growth as they hit a series of headwinds, including a prolonged housing crisis, widening youth unemployment and a global slowdown that is weighing on demand for Chinese goods.

Policymakers have announced a series of targeted measures in recent months, as well as a major multibillion-dollar sovereign bond issue, aimed at boosting infrastructure spending and consumption. But this, as well as the central bank's interest rate cuts and lending stimulus measures, have had little impact so far. In this context, analysts warn that a "bazooka" type of stimulus plan is needed to restore confidence.

"China needs to act quickly and aggressively to avoid the risk of deflationary expectations taking root among consumers," said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.

China's National Bureau of Statistics (NBS) reported yesterday that the consumer price index fell by 0.8% in January, at an annual rate, this being the worst decline recorded since 2009, in the midst of the global financial crisis. According to official figures, this decline is partly explained by the "high comparison base" from the beginning of 2023 (in 2023, the Chinese New Year, when consumption is high, was celebrated in January. This year, the holiday falls on the month of February, which influences the comparison from one year to another).

January's decline in the consumer price index marked the fourth consecutive month of deflation and was much larger than the 0.5 percent decline forecast in a Bloomberg News poll.

The deflation that China is facing is at the opposite pole to the situation in the main economies of the world, especially the Western ones, which are struggling with high inflation and the decrease in the purchasing power of the inhabitants.

China entered deflation in July 2023 for the first time since 2021. After a slight rebound in August, prices have fallen steadily since September.

Lynn Song, economist specializing in China at ING bank, declares: "The main brake on inflation remains food prices, which fell by 5.9% in January, at an annual rate, reaching the lowest level ever recorded. However, the figures do not show that the country is stuck in a deflationary spiral". Song pointed out that China's consumer price index rose by 0.3% in January compared to December.

Even if, at first glance, falling prices seem like good news for purchasing power, deflation is a threat to the economy because consumers tend to postpone purchases in the hope of further price drops. Due to lack of demand, companies are, in turn, forced to reduce their production and accept new price reductions to get rid of unsold stocks. This situation, which affects the profitability of companies, causes them to freeze hiring and even resort to layoffs. Economists speak, in this situation, of an unfortunate spiral that represents an additional brake on consumption.

In response to problems in the world's second largest economy, China's markets have been among the weakest globally in recent months.