In China, the level of consumer prices in March remained virtually unchanged compared to a year ago figure, while the cost of manufactured goods in this Asian country continues to be on a downward trajectory, which is evidence of the existence of deflationary pressures threatening the prospects of the local economic system.

Information about the mentioned indicators was released by the National Bureau of Statistics on Thursday, April 11. The consumer price index in the Asian country showed minimal growth in March. This indicator increased by 0.1% compared to the data for the same period last year. It is worth noting that economists surveyed by the media predicted that the consumer price index in China would rise by 0.4% in March. In February, this indicator increased by 0.7%, climbing above zero for the first time in six months. This dynamic is largely related to the massive celebration of the Lunar New Year.

Also, for the 18th month in a row, a decrease in the producer prices index has been recorded in China. According to data published by the National Bureau of Statistics, the corresponding indicator decreased by 2.8% in March. In February, this indicator showed a decrease of 2.7%.

The drop in prices is likely to be a signal that domestic consumption in China will not become a factor in stimulating the growth of the local economy in the foreseeable future. Currently, the tendency of a gradual increase in the dependence of economic indicators on the volume and scale of Beijing’s export activities is being recorded in this Asian country. In this case, external supplies of industrial goods are meant.

Also, at present, there is a kind of situation of gap in the inflationary process in the two largest economies of the world. In the United States, the vector of the mentioned process is the opposite of the direction that is observed in China. Against this background, the risk of a gap in interest rates between the two largest economies in the world has formed. If the corresponding probability is fully materialized, the yuan will face the problem of increasing downward pressure.

Raymond Yeung, Chief Greater China Economist at Australia & New Zealand Banking Group Ltd., says that the price information published on Thursday in China is evidence that domestic demand in this Asian country is currently weak. According to the expert, the strengthening of the positive inflation vector is largely the result of the intensification of Beijing’s export activities.

Before the information on the consumer price index was published, the central bank of China announced plans to continue to support the national currency. This statement was made after the offshore yuan fell to a three-week low overnight. The reason for the corresponding dynamics is the unexpected inflation data in the United States.

The daily reference rate of the yuan on Thursday was fixed at 7.0968 per dollar. This indicator exceeded forecasts. The gauge of Chinese stocks listed in Hong Kong fell by 1.8%.

High inflation during the February holidays in China and the revival in the local sphere of tourism have intensified expectations that, perhaps, the Asian country will see an increase in household spending in the foreseeable future. However, in this case, the seasonal factor was fixed, and not the initial stage of the stable tendency.

Dong Lijuan, an analyst at the National Bureau of Statistics, says that the slowdown in consumer inflation is due to a seasonal decrease in consumer demand in March after the holidays. In this context, it was also mentioned that the supply on the market as a whole was sufficient.

It is worth noting that without an increase in domestic consumption, it will be extremely difficult for Beijing to achieve the 2024 economic growth target of about 5%. Whether the mentioned goal becomes an objective fact of reality depends on the performance of Chinese exports during the current year.

It is worth mentioning that this week, experts from Goldman Sachs Group Inc. and Morgan Stanley boosted their outlooks of economic growth in the Asian country against the background of accelerating external supplies of local products at a pace that exceeds preliminary expectations. Also, the change in the vision of the prospects of China’s economic system is partly due to the intensification of the operation of local factories, which also turned out to be more significant than early estimates regarding the most likely dynamic in this area of activity.

Goldman experts, led by Hui Shan, suggest that in the first quarter of 2024, the Asian country’s economy could grow by 7.5% compared with the result for the same period last year. It is worth noting that this is only a preliminary opinion, not official data. Initially, Goldman analysts predicted that the Chinese economy would grow by 5.6% in the first quarter of 2024. In this case, the final results, which so far have the form of assumptions, exceeded preliminary expectations.

Goldman experts also expect that for the whole of 2024, the Asian country’s economic system will show growth of 5%. It is worth noting that this indicator corresponds to the target figure of the Chinese leadership. The previous version of Goldman’s forecast regarding the economic prospects of the Asian country in the current year provided for growth of 4.8%.

Morgan Stanley experts have also changed their vision for the dynamic of the economy of China in 2024. In this case, it was noted that Beijing’s export activity demonstrates high-intensity growth, which can be described as a stable and sustainable process. Morgan Stanley experts also draw attention to the fact that in the United States, there is currently a high level of demand for products supplied from China. They predict that in 2024, the Asian country’s economic system will show growth of 4.8%. It is worth noting that the previous version of their forecast provided for an increase in the mentioned indicator by 4.2%.

A Morgan Stanley report released this week notes that China’s increased focus on supply chain modernization is likely to cause an increase in capital expenditures in the manufacturing sector.

The world’s second-largest economy is currently trying to restore the positive dynamic. As part of the relevant efforts, Beijing is facing the counteraction of such negative circumstances as the crisis in the real estate sector and weak consumer spending.

Other experts from various banks and research companies interviewed by the media predict that the further official data, which will be published next week, will show that in the first quarter of 2024, China’s economy grew by 5%. It is worth noting that in the last three months of 2023, the corresponding figure increased by 5.2%.

Goldman experts say that the current macroeconomic data on China is solid. In their opinion, the local economy found a local bottom at the end of 2023 and is currently on a recovery trajectory, which can also be described as a path to growth.

Goldman also notes the intensification in the sphere of Chinese tourism. One example of this tendency is that the level of consumer spending at the Qingming Festival last week exceeded the figure observed before the coronavirus pandemic. Goldman, based on its calculations, reports that in China, inventories increased in the first quarter of 2024.

Morgan Stanley economists, led by Robin Xing, predict a continued decline in overall prices in the Asian country. In this case, the so-called gross domestic product (GDP) deflator is meant. Experts expect overall prices in China to decrease by 0.1% in 2024. They also note a possible persistent low inflation in the Asian country due to Beijing’s supply-centric economic policy. It is worth noting that last year deflation was recorded in China, which became the longest since the 1990s.

Morgan Stanley also revised down forecasts for household consumption in the Asian country. Experts noted that this decision is due to limited progress on economic rebalancing and a potential slowdown in wage growth against the background of sluggish corporate profitability.

Morgan Stanley analysts say there is little chance that Beijing’s economic policy will change in the foreseeable future. In their opinion, such decisions will not be made at the meeting of officials dedicated to economic issues, which will be held at the end of April. They also say that appropriate measures will not be announced in the summer. It is worth clarifying that in this case, changes in the form of monetary policy easing are implied. According to Morgan Stanley experts, such a probability will become more realistic in the event of a significant slowdown in sequential economic growth.

Eric Zhu, an expert at Bloomberg Economics, says that deflationary pressure will not ease unless the People’s Bank of China changes its monetary policy. The expert expects that the financial regulator of the Asian country will cut interest rates in the second quarter of the current year.

Returning to the topic of the cost of goods, it is worth noting that the fall in food prices caused the headline consumer price index to decrease by 0.5% last month. The growth in the cost of tourist goods and services slowed to 6% year-on-year in March.

The downturn in the housing market has so far shown no signs that the current state of affairs will change towards improvement in the foreseeable future. The low level of demand for building materials, such as steel, provokes a decrease in producer prices. The overall index fell 2.8% in March. This is the continuation of the longest streak of decline since 2016. Metal smelting and pressing costs increased by 7.2% year-on-year in March. At the same time, the cost of mining and washing coal used for steelmaking showed a drop of 15% last month.

The slowdown in inflation continues to be a factor of pressure on the Chinese government as part of its economic policy. In the context of the current circumstances, Beijing needs to take more extensive backing measures. In this case, it means comprehensive programs and some kind of massive solutions to stimulate economic growth. Falling prices are the reason for the decrease in company profits. Against this background, the motivation of businesses to invest has significantly declined. Also, in the context of falling prices, there is a risk of an even greater drop in consumer activity, since buyers may begin to expect that goods will continue to become cheaper in the future.

Bruce Pang, chief Greater China economist at Jones Lang LaSalle Inc., says the monetary policy of the Asian country’s financial regulator is likely to remain loose. At the same time, the expert stated the likelihood of a constraint for local banks. In this context, Bruce Pang stated that inflation in the United States, which turned out to be higher than previously expected, is likely to be the reason that the Federal System will not start cutting interest rates shortly. According to the expert, against this background, it will be more difficult for the Chinese financial regulator to lower the cost of borrowing, although this decision is necessary due to concerns about the weakening of the yuan.

Deflation is likely to continue to be a factor of pressure on the Asian country’s economic system in the coming months. The realism of the relevant perspective is confirmed by the fact that some segments of the Chinese economy are experiencing increased price competition. Companies producing building materials were forced to lower their charges due to overcapacity. At the same time, electric car makers are offering consumers aggressive discounts to gain customers.

Currently, the head of the People’s Republic of China, Xi Jinping, is trying to make a kind of transition in the sphere of economic policy. The current economic model of the Asian country is largely based on the real estate sector, which is currently experiencing a deep crisis. Xi Jinping strives to ensure that high-end manufacturing becomes the main driving force of a positive dynamic. In this case, it means the dynamic of economic development. Such efforts are important in the context of the fact that China’s relations with the United States and the European Union are currently deteriorating. US Treasury Secretary Janet Yellen visited the Asian country this week. She came to China to discuss the problem of local industrial overcapacity. Janet Yellen also said that Washington is determined to protect its industry from dumping cheap exports coming from the Asian country. Separately, she noted that Beijing should step up actions to stimulate domestic demand.

German Chancellor Olaf Scholz is expected to visit China this week. The media reports that he is likely to appeal to the authorities of the Asian country to expand the access of foreign companies to the local market. The results of a survey conducted by the German Chamber of Commerce in China indicate that 79% of firms in this European country intend to continue investing in the Asian state. German companies plan to maintain their presence in China. Nowadays Beijing is one of Berlin’s main trading partners.

It is worth noting that the EU is currently conducting multiple probes on exports from China. Local regulators claim that Beijing implements the practice of over-subsidizing manufacturers, including makers of electric vehicles.

As we have reported earlier, Fitch Downgrades China’s Outlook.