Economists are urging the Chinese government to implement extra stimulus measures as the China moves from inflation to deflation. Without proper policies the condition may pose further strain on the country’s domestic consumption, resulting in weaker economic growth.
China’s July consumer price index faced the first year-on-year decline since early 2021 which fell by 0.3% in from a year ago. The producer price index also fell by 4.4% in compared to last year, but still better than the 5.4% decline in June.
The data for both CPI and PPI has entered in deflation territory, meaning that China is witnessing a persistent decrease in prices over time. The underlying reason to this development, according to Zhiwei Zhang, president and chief economist of Pinpoint Asset Management, is because China’s economy continues to lack domestic demand and spending.
It was actually since the pandemic that tight domestic demand dragged on the country’s economy. Hence, if prices continue to decline, people may refrain from spending in hopes for prices to get even lower. It gets worse once it decreased companies’ profitability which may even lead to unemployment. In fact, the second-quarter data signaled several economists towarn of growing risk of deflation.
Ultimately, if officials cannot contain the fall in demand from the country that is the world’s largest marketplace for energy, raw materials and food, it would inevitably hit global exports and contribute to a gloomy global economy’s growth.
According to Eswar Prasad, a professor of trade policy and economics at Cornell University, the Chinese government has been sending the message that everything is under control, but has so far refrain from taking major measures to encourage growth.
Professor Prasad suggestion for China’s recovery is for the government to build confidence among investors and consumers. He said: “The real issue is whether the government can get confidence back in the private sector, so households will go out and spend rather than save, and businesses will start investing, which it hasn’t accomplished so far”
“I think we’re going to have to see some significant stimulus measures (including) tax cuts.” He added.