Economic data recently released from China has indicated a decline in consumer prices compared to the previous year—an unfavorable development as the world’s second-largest economy strives to recover from the Covid-19 pandemic-induced slump.
Despite this news, the impact on stock markets has been relatively minimal. The Shanghai Composite index remained relatively unchanged, while Hong Kong’s Hang Seng index experienced a slight decrease of 0.3%. However, notable retailers such as Alibaba (BABA) and JD.com (JD) faced more significant declines in their share prices.
Although October’s negative inflation—a 0.2% drop in the consumer price index from the previous year—is not technically considered deflation, some might label it as such for simplicity. In economic terms, deflation typically refers to an extended period of declining consumer prices and asset values, which can have widespread detrimental effects.
ING analyst Robert Carnell describes deflation as a “very pernicious situation” that results in a significant slowdown in economic activity. He explains that China’s current condition involves a low rate of underlying inflation, indicating relatively weak domestic demand.
There is concern that China may follow a similar path of deflation as Japan experienced throughout the 1990s. However, given China’s vast population of 1.4 billion people and its ongoing efforts to catch up with advanced economies in terms of wealth, this outcome appears unlikely.
The recent decline in food prices, particularly the substantial 30% annual drop in pork costs, primarily contributed to the decrease in inflation last month. This marks the second negative reading since July, with prices remaining stagnant in June and September.
These price-related figures surface shortly after separate data revealed a decline in exports for October and an unexpected contraction in manufacturing. China continues to grapple with the aftermath of a massive property downturn and a sluggish recovery since lifting pandemic-related restrictions a year ago.
To reignite the economy, the Chinese government has implemented incremental stimulus measures. However, it remains cautious about stimulating it too much to avoid another surge in asset prices. Despite these challenges, the central bank governor expressed confidence in achieving the target of 5% economic growth for this year.