China faces its biggest deflation threat since 2009 as consumer prices plummet

China encountered its deepest deflationary threat since 2009 as consumer prices witnessed a severe decline in January, highlighting the persistent challenges for the world's second-largest economy in its struggle for recovery.

The National Bureau of Statistics revealed that the Consumer Price Index (CPI) experienced a 0.8 per cent year-on-year drop, marking the most significant decline since September 2009, following a 0.3 per cent decrease in December.

Amid a challenging economic landscape, the CPI rose by 0.3 per cent month-on-month.

Analysts had anticipated a 0.5 per cent year-on-year fall and a 0.4 per cent month-on-month gain, underscoring the severity of the economic headwinds.

The persistent deflationary pressure depicted in China's CPI data underscores the urgency for decisive and swift actions by policymakers to prevent the entrenchment of deflationary expectations among consumers.

Despite the official target of around 5 per cent economic growth being met in 2023, the recovery has been lacklustre.

A contraction in factory activity in January, coupled with challenges like a property downturn, local government debt risks, and weak global demand, adds to the complexity of China's economic revival.

Analysts emphasise the need for proactive measures to counter deflationary risks.

China has grappled with slowing prices since early last year, leading policymakers to implement interest rate cuts to stimulate growth.

The growth target for 2023 was achieved at 5 per cent, but the resilience of the recovery has been questioned.

A growth target of around 5 per cent is anticipated for the current year.

In late January, China's central bank announced its most substantial cut to bank reserves in two years, signalling robust support for the fragile economy.

However, analysts stress the necessity for additional measures to boost confidence and demand effectively.

Core inflation, excluding volatile food and energy prices, saw a 0.4 per cent gain from a year earlier, down from December's 0.6 per cent.

Despite last year's CPI rising by 0.2 per cent, missing the official target of around 3 per cent, inflation has fallen short of annual targets for 12 consecutive years.

Citigroup economists expect a mild reflation in 2024, forecasting annual CPI inflation at 1.2 per cent year-on-year.

The cyclical drivers for CPI could shift in 2024, contingent on the return of consumer confidence, with the strength of reflation hinging on these factors.

In addition to consumer prices, the Producer Price Index (PPI) recorded a 2.5 per cent year-on-year decline in January, following a 2.7 per cent fall in the previous month.

Factory-gate prices experienced a 0.2 per cent month-on-month decrease.

Prolonged factory deflation poses a significant threat to the survival of smaller Chinese exporters who find themselves embroiled in relentless price wars amid shrinking business opportunities.

(With inputs from Reuters)