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China's consumer prices fell at the fastest rate in 15 years in January, defying analysts' expectations and highlighting the challenges facing policymakers trying to revive investor confidence in the world's second-largest economy.
The country's consumer price index fell by 0.8 percent year-on-year in January, according to official statistics released on Thursday, the fourth straight month of declines and the largest contraction since 2009.
The decline, which was steeper than a 0.5 percent decline in a Reuters poll of analysts and a 0.3 percent drop in December, comes as China's economy faces an extended property slump, a stock market collapse and weak export revenues.
“Many indicators are now flashing red, indicating a risky period for the Chinese economy and China’s financial markets,” said Eswar Prasad, a professor of economics at Cornell University and former head of the IMF’s China division.
The consumer price index rose 0.3 percent on a monthly basis, which was less than the Reuters poll's forecast of a 0.4 percent rise but stronger than the 0.1 percent increase in December.
The producer price index improved marginally, falling 2.5 percent year-on-year in January, a slight improvement from a 2.7 percent decline in December and analysts' expectations of 2.6 percent.
China's economy slid into recession in July, and prices have held steady or fallen in every month since except August, prompting economists to warn that a prolonged downturn could undermine business and consumer confidence.
Analysts said that deflationary pressures affect corporate profits and lead to a decline in the stock market. China on Wednesday fired the head of its market watchdog, Ye Huiman, in a move analysts said was aimed at calming investors angry about huge stock losses.
“China’s ongoing deflation and faltering stock markets suggest that household demand and private sector confidence remain weak, posing significant risks to economic growth prospects,” Prasad said. As deflation takes hold in China, increasingly heavy political support will be needed to rebuild confidence and pull the economy out of the quagmire.
The National Bureau of Statistics said the consumer inflation figure was affected by the timing of the Lunar New Year holiday, which boosted spending in January last year but this year falls in February.
This amplified the decline in the CPI number last month, said Lin Song, chief economist at ING Bank in Greater China, adding that the impact of pork prices, which had been leading the deflation, should moderate in February. He said increased consumer spending during this year's festival would help push price growth into positive territory this month.
While food prices fell by 5.9 percent last month, non-food prices rose by 0.4 percent year-on-year, the statistics office said.
The office added that producer prices in January were “affected by fluctuations in global commodity prices.” China's producer price index has been declining for 16 straight months.
Economists began looking forward to the annual “two sessions” of China's parliament and its key advisory committee in March, when President Xi Jinping's government is expected to set priorities for the year.
Economic growth last year slightly exceeded the government target of 5.2 percent. But to reach that level, policymakers had to roll out a range of measures to address the real estate slowdown and a less-strong-than-expected recovery in consumption from the coronavirus pandemic.
Officials are expected to set a GDP growth target of about 5 percent in 2024 next month, similar to the 2023 target, which was the lowest in decades.
Beijing's partial stimulus measures include easing critical lending rates and targeting strategic sectors with credit, along with selective efforts to support the real estate sector, which typically accounts for more than a quarter of economic activity.
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