China urged to take bolder steps to tackle price wars, deflation
Beijing's latest push to curb price wars may help ease deflationary pressures, but analysts warn the current measures fall short of addressing deeper structural problems facing the world's second-largest economy.
China's GDP deflator – a broad measure of prices across goods and services – has been negative since the second quarter of 2023, while consumer prices have fallen for four straight months year-on-year. To stop the deflationary spiral, Chinese authorities should address the cause: weak domestic demand, analysts said.
'So far, attempts to revive inflation by trimming supply and reducing overcapacity have shown limited results,' Miao Yanliang, chief strategist at Beijing-based investment bank China International Capital Corporation (CICC), wrote in a research note.
'Weak demand remains the underlying problem.' Despite policymakers flagging cutthroat competition as a concern at the tone-setting Central Economic Work Conference last December, there are few signs of a rebound in prices, said Miao, who previously worked as a senior economist at the State Administration of Foreign Exchange for a decade.
Miao attributed the current deflationary spiral to downturns in the financial and property sectors as well as diminishing income expectations among Chinese households.
The warning came as the Chinese economy grapples with persistent structural challenges. Excess capacity across multiple sectors has suppressed both producer and consumer prices, while job insecurity and a prolonged property slump have made households reluctant to spend.
China's consumer price index (CPI), a key gauge of inflation, declined for a fourth straight month in May – falling 0.1 per cent year on year, according to the National Bureau of Statistics. The producer price index (PPI) has continued to contract since October 2022.
June price data is scheduled for release on Wednesday.Last week, China's top leadership addressed 'disorderly low-price competition' during a meeting of the Central Financial and Economic Affairs Commission, the Communist Party's highest economic policymaking body.
It pledged to cut production capacity in an 'orderly' fashion, though without naming specific industries or targets.
Compared to supply-side adjustments, analysts said demand-side stimulus remains the most effective lever for tackling deflation.
To break the cycle, the CICC note recommended repairing 'corporate balance sheets' through capital injections, interest subsidies and corporate restructuring. This would help revive investment sentiment and employment, paving the way for a recovery in household income and assets, it added.
Miao also called for raising household incomes by stabilising employment, increasing cash flow and strengthening the social safety net to ease consumer concerns and unlock spending potential.
Chinese authorities have doubled down on subsidies, including a 300 billion yuan central government trade-in programme this year, to stimulate domestic consumption amid external headwinds.
But there are fears the impact could be limited.
'When it comes to boosting consumption, there are few policy tools available to generate substantial traction on the demand side,' Mao Zhenhua, co-director of Renmin University's Institute of Economic Research, told a forum in Hong Kong on Friday.Deflationary risks have been exacerbated by falling investment returns and mounting pressure on income and employment, with external headwinds also weighing on prices, he warned.
The trade war with the United States would have 'a lasting impact on China's medium- to long-term economic fundamentals' and could further intensify the country's 'involutionary' dynamics, Mao added – a term used by officials to describe intense and self-defeating domestic competition.
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