China's economy is facing a complex situation, with consumer prices unexpectedly dropping in September, deepening deflationary pressures. This downturn highlights significant challenges in domestic demand and international trade, painting a picture of economic uncertainty.
Let's break down what's happening. The Consumer Price Index (CPI), which measures the average change over time in the prices paid by urban consumers for a basket of consumer goods and services, fell by 0.3% in September compared to the previous year. This decline was more pronounced than the 0.2% drop economists had predicted, although it was slightly better than the 0.4% decrease in August. On a month-to-month basis, prices edged up by 0.1%, a smaller increase than the expected 0.2%.
Core CPI, which excludes volatile food and energy prices, showed a rise of 1.0% year-on-year, the highest since February 2024. This could be seen as a positive sign, but as Zhiwei Zhang, from Pinpoint Asset Management, noted, trade tensions and an uncertain growth outlook are still hindering demand recovery. He believes it's premature to assume that deflationary pressures are easing.
Meanwhile, the Producer Price Index (PPI), which reflects the prices received by domestic producers for their output, fell by 2.3% year-on-year, in line with forecasts. While this marks a continued decline, it's an improvement from the 2.9% drop in August and 3.6% in July. This downward trend in producer prices has persisted for almost three years, affecting manufacturers already grappling with weak consumer confidence and trade-related production disruptions.
But here's where it gets controversial... Weak consumer demand, a struggling housing market, and U.S. tariffs are all contributing to the economic strain. While overall exports have grown this year, shipments to the U.S. have seen double-digit declines since April. If the U.S. imposes additional tariffs, levies on Chinese exports could jump to around 155%.
According to the National Bureau of Statistics (NBS) spokesperson, Dong Lijun, the CPI decline is partly due to a "tail effect" from higher prices last year. Excluding this effect, consumer prices actually rose by 0.5% year-on-year. The biggest price drops were in food and energy, with decreases of 4.4% and 2.7%, respectively. On the other hand, industrial consumer goods like gold and platinum jewelry saw prices soar by 42.1% and 33.6%.
Accommodation and air ticket costs fell by 1.5% and 1.7%, respectively, in September. This was due to a price war among hotels, airlines, and travel agencies ahead of the Golden Week holiday.
Alfredo Montufar-Helu from Ankura Consulting's GreenPoint Business, points out that these economic figures highlight the structural challenges China faces in rebalancing its economy, including softening demand, overcapacity, and intense price competition, which are putting business resilience to the test.
And this is the part most people miss... The Chinese government has been trying to curb excessive price competition across industries. These efforts are starting to show results. Industrial profits jumped by 20.4% in August, reversing previous declines. The NBS attributes this to policies curbing overcapacity and improving market order. Sectors like coal processing, mining, and battery manufacturing are seeing price declines ease significantly.
However, as Tianzeng Xu from the Economist Intelligence Unit notes, these measures are unlikely to lead to an immediate CPI increase due to weak demand, and the stabilization of the CPI remains fragile, especially with the housing and labor markets still struggling.
What do you think? Are these economic challenges temporary, or do they point to deeper issues? Share your thoughts in the comments below!
