China: Government Shifts to Fight Deflation

■ China's economic activity, including production, consumption, and investment, declined further in August.  
■ While curbing excessive corporate competition has shown initial success, new demand-generating measures are urgently needed. 
 
    China released a series of economic indicators for August yesterday. Key indicators, such as industrial value added (5.2% year-on-year growth), total retail sales of consumer goods (3.4% year-on-year growth), fixed asset investment (excluding rural areas, up 0.5% year-on-year to date), and the services production index (up 5.6% year-on-year), all showed a slowdown in growth, indicating a further easing of the pace of economic expansion. While industrial value added and the services production index remained above the Chinese government's 5% growth target, the growth rates of retail sales and fixed asset investment remained below 5%. The real estate market correction continued, with declines in real estate development investment (down 12.9% year-on-year to date) and real estate sales (down 4.7% year-on-year by area) deepening. New residential prices in 70 major cities (down 2.5% year-on-year and 0.3% month-on-month, according to Reuters estimates) have fallen month-on-month for four consecutive months, continuing the price adjustment trend. Trade data released on the 8th showed that export growth (up 4.4% year-on-year) slowed for the first time in three months. Although the US extended the grace period for additional tariffs on China until November 10th, the decline in exports to the US (down 33.1% year-on-year) continued to widen. While this reflects a surge in orders in July, the recovery in external demand is also showing signs of stagnation amidst continued sluggish domestic demand. 
 
    The Consumer Price Index (CPI) (down 0.4% year-on-year, unchanged from the previous month) and the Producer Price Index (PPI) (down 2.9% year-on-year, unchanged from the previous month) released on the 10th showed a halt in the month-on-month decline. On a year-on-year basis, the CPI declined due to falling food prices, but the core CPI (which excludes food and energy) (up 0.9% year-on-year, unchanged from the previous month) has accelerated for four consecutive months, indicating that deflationary pressures are easing. At a meeting of the Central Financial and Economic Affairs Commission on July 1st, the Chinese government proposed using legal means to regulate disorderly price competition among businesses. President Xi Jinping also listed this as a top priority in his "Important Article," published in the official journal of the Central Committee of the Communist Party of China on September 16th. While deflationary measures have shown some success, the producer price index (PPI) has declined in export-oriented sectors such as pharmaceuticals, chemical fibers, advanced product sectors like automobiles (including new energy vehicles), and electronics (smartphones, integrated circuits, etc.), reflecting widespread price competition among businesses. Despite continued government support for industrial development and market expansion, supply continues to outpace demand. As the trade-in boom driven by government incentives for consumption gradually subsides, the need for new demand-generating measures is growing.