China has entered an era of low consumer prices

China’s National Bureau of Statistics (NBS) will release the July economic data on Aug. 9, which will answer such questions as whether the Chinese economy will turn around after the central government reaffirmed maintaining stable growth as a top priority, whether China has entered an era of low consumer prices, and whether Chinese companies will survive the hard times.

The NBS is expected to release a monthly report covering the country’s key economic indicators such as the Consumer Price Index (CPI), Producer Price Index (PPI), output of major industrial enterprises, fixed-asset investment, total retail sales of consumer goods, and real estate investment and sales.

Stagflation risks rising in China

Most market analysts forecast the year-on-year growth rate of China’s July CPI to fall back below 2 percent. After the CPI slid to a 29-month low in June, overall food prices in the country were stable in July despite minor fluctuations, which, along with the easing carry-over effect, may drive the CPI growth rate in July down to a new low of around 1.7 percent.

“It is certain that China has entered an era of low consumer prices,” said Sun Lijian, deputy dean of the School of Economics at Fudan University.

Sun believes the main reason for the declining CPI is not the easing carry-over effect, but the continued weak market demand. “On the one hand, there is a lack of real demand. On the other hand, investment demand has fallen further mainly due to the rising worries over domestic and global economies.”

“At present, the Chinese economy is indeed facing the problem of insufficient consumer demand,” echoed Liu Xintian, chief analyst at SunSirs, a leading provider of bulk commodities information and prices in China. “The economic stimulus policies introduced during the 11th Five-Year Plan period (2006-2010) boosted domestic consumer demand, but also over drafted people’s purchasing power, leading directly to current weak consumer demand.”

Many analysts take the declining CPI as a worrying sign of deflation in China, but Sun disagrees, saying, “China’s economy is undergoing stagflation rather than deflation. The country’s excess money supply remains, and liquidity funds continue to exist, but has not entered the real economy. Inflation risks are still high.”

“At present, there are a large number of liquid funds that are not enthusiastic about investing. Just because we fail to see them in stock markets or banks does not mean they do not exist. For instance, a city’ real estate sector will receive a massive capital influx if property control eases. The situation will get out of control once the large amounts of idle funds are unleashed to enter the virtual economy,” Sun said worriedly.

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