China's Consumer Inflation Slows in December

In December, consumer inflation in China showed signs of slowing, leading to modest annual price increases for the coming year of 2024. This shift occurred against a backdrop of ongoing factory-gate deflation, which has now continued for two years, reflecting weak economic demand.

Several factors have contributed to this dip in demand. Job insecurity, a continuous slump in the housing market, high levels of debt, and the threat of tariffs from the incoming U.S. administration have all played a role, even as the Chinese government attempts to stimulate consumer spending.

According to the National Bureau of Statistics, the consumer price index (CPI) rose just 0.1% in December compared to the same month last year. This marks a decrease from the previous month's increase of 0.2% and is the slowest growth rate since April. This result aligns closely with predictions made in a Reuters poll of economists.

On a month-on-month basis, CPI remained unchanged, contrasting with a 0.6% decline observed in November and matching forecasts. Meanwhile, core inflation, which excludes the more volatile food and fuel prices, saw a slight rise of 0.4%, up from 0.3% in November—the highest rate in five months.

For the entirety of 2023, the CPI increased by 0.2%, matching the previous year's growth rate and falling short of the official target of around 3%. This suggests that inflation targets have been missed for the 13th consecutive year.

The market is also witnessing impacts from a price war in the electric vehicle sector, which is now entering its third year. Additionally, discounts are becoming more common across various retail sectors, including bubble tea shops.

As consumers adopt a more cautious approach, many are now choosing to rent items such as cameras and handbags rather than purchasing them outright.

On the production side, the producer price index declined by 2.3% year-on-year in December, a slight improvement compared to the 2.5% drop in November and above the expected 2.4% decrease. Factory-gate prices have now been on a downward trend for 27 months straight.

In late December, the World Bank revised its growth forecast for the Chinese economy for both 2024 and 2025. However, it also highlighted that low consumer and business confidence, coupled with challenges in the property sector, would continue to hinder economic progress.

To combat these economic challenges, China has authorized a substantial $411 billion in special treasury bond insurance to enhance fiscal stimulus efforts aimed at reviving its struggling economy. Furthermore, the state planner announced plans to significantly increase funding through ultra-long treasury bonds in 2025 to encourage business investment and boost consumer spending.

Additionally, authorities have set aside $41 billion from government bonds in July with the aim of financing upgrades in equipment and encouraging trade-ins for consumer goods, including automobiles.

China, Inflation, Economy