China slips into deflation as demand weakens across country

For the first time since 2021, bothconsumer and producer prices have contracted in China, a telltale sign of deflation as demand weakens in the world's second-largest economy.

According to the National Bureau of Statistics (NBS), the consumer price index dropped 0.3 per cent in July, compared to the same period last year. Analysts argue that slowing domestic spending continues to weigh on the country's post-Covid economic recovery, even as Bloomberg had anticipated a 0.4 per cent decline.

Meanwhile, the Producer Price Index, which gauges the change in selling prices received by the domestic producers for their output, fell by 4.4 per cent in July, more than the 4.1 per cent expected by economists.

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After the release of the reports, the Shanghai Composite was down 0.29 per cent and theShenzhen Component 0.21 per centlower. Hong Kong’s Hang Seng index shed 0.42 per cent.

The data by NBS comes a day after it was revealed that Beijing's exports fell last month at their fastest pace in more than three years, setting up warning bells. Additionally, imports also dropped for a ninthconsecutive month as consumers refuse to spend on goods.

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Deflation can have a multiplying effect. Although some might see a dip in prices as a good indicator of increasedpurchasing, consumers often tend to postpone purchases in the hopes of further reductions.

The dip in demand then forced the companies to slash their production, put a freeze on hiring or even lay off some of the workers. They are forced to agree to new discounts to sell off their stocks, in order to maintain some profitability even as costs remain the same.

Despite the weak economic signs, there appears to be no indication from the Politburo that a big-bang stimulus will be provided. Last week, brokerage firm Morgan Stanley also downgraded China's rating to 'equal weight' while its arch-rival India's was updated to 'overweight'.

In simple words, an 'overweight' rating indicates that the brokerage firm anticipates India to do better in the future.

"We think returning India to an 'overweight' rating and downgrading China to 'equal weight'is warranted," analysts said, referring toIndian markets' outperformance over China as a sign of a structural breakout in favour of New Delhi.

(With inputs from agencies)

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