China’s consumer inflation dips below expectations in March, calls grow for policy stimulus

China’s consumer prices rose slightly in March compared to the previous year but didn’t meet economists’ expectations, revealing ongoing challenges in stimulating domestic demand for the world’s No. 2 economy. 

The spectre of deflation seems to be gradually receding, but the persistent property crisis continues to cast a shadow over consumer and business confidence. 

Official data released on Thursday revealed that China’s consumer price index in March showed a mere 0.1 per cent increase compared to the previous year, lower than the 0.7 per cent uptick in February and below the forecasted 0.4 per cent.  

“While we believe that data will gradually show that China is not stuck in a deflationary spiral, nonetheless inflation remains well below target, and looking at economic fundamentals alone, we think the economy would benefit from further rate cuts,” said Lynn Song, Chief Economist, Greater China at ING. 

“Low inflation offers room for policy easing but RMB stability priority may limit appetite for rate cuts.” 

This subdued CPI figure comes amidst a mixed bag of economic signals in the first quarter, where factory activity showed signs of expansion in March after a six-month contraction. 

However, the National Bureau of Statistics reported on Thursday a decline of 2.8 per cent in the producer prices index compared to February’s 2.7 per cent, indicating persisting deflationary pressures in the manufacturing sector. 

On Tuesday, Fitch, a US-based rating agency, revised its long-term outlook on China to negative while maintaining its A+ credit rating.  

The rating agency attributed this adjustment to China’s pivot away from growth primarily fueled by the property sector, introducing heightened uncertainty.  

The agency also predicted a rise in the general government deficit to 7.1 per cent of GDP in 2024, the highest since 2020, attributed to the impact of China’s stringent COVID measures. 

China’s economic slowdown, particularly in the real estate sector due to a significant debt crisis among property developers, has dampened consumer sentiment for home purchases, a crucial aspect of China’s economic landscape. 

Despite these challenges, China has set an ambitious economic growth target of around 5 per cent for the current year. However, achieving this goal will require surmounting various economic hurdles, including the slowdown in the real estate market and waning investor confidence.