China officially falls into deflation

On August 9, the National Bureau of Statistics of China (NBS) released a report showing that the Consumer Price Index (CPI) - a key measure of inflation - decreased by 0.3% in July compared to the same period last year.

China's CPI falls for first time in more than two years. (Source: Reuters)

Thus, China has officially fallen into deflation as its CPI fell for the first time in more than two years.

Also according to the NBS, China's Producer Price Index (PPI) fell 4.4% in July, marking the 10th consecutive month of decline. Falling producer prices often mean a decline in corporate profit margins.

It was the second disappointing data release for the world's second-largest economy this week.

Earlier, on August 8, official statistics showed that the country's exports fell at the highest level in more than three years.

The Northeast Asian nation's economy experienced a brief period of deflation in late 2020 and early 2021 due to a plunge in the price of pork - the most consumed meat in the country.

Many analysts fear deflation will last longer this time - with the country's main growth drivers stalling and youth unemployment at a record high above 20%.

Economist Andrew Batson of market research firm Gavekal Dragonomics said the ongoing instability in the real estate sector is the main source of the deflationary shock. This sector accounts for 25% of China's Gross Domestic Product (GDP).

In addition, weak export performance is also a factor contributing to China's deflation as it is the main source of growth for the world's second-largest economy.

At the same time, deflation would pose a threat to the broader economy as consumers would then tend to delay purchases.

However, the decline in demand has forced companies to cut production, stop hiring or lay off workers, and offer discounts to sell off inventory, all of which affect business profits.

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