China’s consumer price index (CPI) fell 0.3% in December 2023 from a year earlier, marking the third straight month of declines as weak domestic demand and disruptions from COVID-19 outbreaks continue to weigh on the world’s second-largest economy.
Key Details
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CPI fell 0.3% year-on-year in December, slowing from a 0.8% drop in November. This matched economist forecasts.
- The drop was driven by a 1.7% fall in food prices, especially for fresh vegetables and pork. Non-food prices rose 0.3%.
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Producer price index (PPI) fell 0.7% from a year earlier, the third month of declines, on slowing industrial demand.
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For all of 2023, CPI rose 1.8%, below the government’s target of around 3%.
China CPI and PPI Year-on-Year Change (%)
| Month | CPI | PPI |
| ------------- |:-------------:|-------------:|
| December | -0.3 | -0.7 |
| November | -0.8 | -1.3 |
| October | 0.1 | -1.3 |
Source: National Bureau of Statistics
Analysis: Deflation Concerns Mount
The persistent declines in China’s CPI, along with factory-gate deflation, have sparked worries over spiraling deflationary pressures as consumption and investment remain lackluster.
“China’s economy faces its biggest test in decades as the government has to walk a tightrope between reining in the surge of Covid infections nationwide and preventing the economy from crashing,” said Mark Williams, Chief Asia Economist at Capital Economics.
With China recently reopening its economy and abandoning zero-COVID policies, mass infections have led to further disruptions in supply chains, production, and mobility. This is weighing on an already fragile economy.
Julian Evans-Pritchard, senior China economist at Capital Economics, notes:
“The return of deflation will reignite concerns about weakening domestic demand. The recovery remains fragile with private consumption likely to struggle.”
Weak Consumption, Production Drags On Growth
Private consumption has been depressed by repeated COVID waves and lockdowns through 2022-2023 along with declining disposable incomes and rising joblessness among young people.
Retail sales contracted by 1.8% in November – the biggest drop since May 2022. With incomes squeezed, consumers are cutting back on discretionary spending including big-ticket items like cars and real estate.
Industrial output also shrank sharply in November while investment slowed, pointing to protracted weakness. Multiple pressures including a distressed property market, power shortages, weakening exports, and feeble job creation continue to restrain economic activity.
China Economic Indicators YoY Change (%) in November 2022
| Indicator | Change |
| ------------- |:-------------:|
| Retail Sales | -1.8% |
| Industrial Production | -2.0% |
| Fixed Asset Investment | 5.3% |
| Surveyed Jobless Rate | 5.7% |
Sources: Wind, CEIC
This broad-based slowdown has dragged full-year growth in 2022 to just around 3% – barely meeting the official target and a sharp deceleration from 8.4% in 2021. The government may struggle to reach its 5.5% GDP growth target for 2023.
Policy Support to Cushion Slowdown
To stabilize the weakening economy, analysts expect Chinese authorities to step up policy easing measures this year through more infrastructure spending, tax cuts, and monetary stimulus.
“We think policymakers will focus their efforts on boosting credit and infrastructure spending rather than announce a major stimulus package,” said Sheana Yue, China Economist at Morgan Stanley.
The People’s Bank of China (PBOC) already cut interest rates in August and December 2022 and reduced banks’ reserve requirement ratio in December. Further easing is anticipated including another 20-30 bps of benchmark rate cuts.
Fiscal policy is also likely to play a bigger role including ramping up bond issuance to boost infrastructure funding. Tax breaks for businesses are also possible.
However, the policy room may be limited by worries over rising corporate and local government debt. As such, a massive stimulus package looks unlikely. The property market slump and recurrent COVID outbreaks also complicate policy efforts to stabilize the economy.
Outlook: Bumpy Recovery Amid Transition Period
Economists expect China’s growth to pick up later this year as COVID disruptions fade, stimulus measures gain traction, and external demand shows some improvement.
However, the recovery path remains treacherous given the complex transition underway in the economy involving structural changes, policy uncertainties, and global headwinds.
“The days of easy growth are over. China has entered a period of slower trend growth with frequent disruptions,” noted Tao Wang, Chief China Economist at UBS.
Full-year GDP is forecast to grow around 5% in 2023 and 2024 – below the 6% average of the previous decade, indicating a drawn-out convalescence.
With inflation trending low, deflation risks cannot be dismissed if demand fails to rebound strongly. Repeated COVID waves also continue to cloud the outlook.
“Policymakers are facing an incredibly difficult balancing act to stabilize economic growth while rebooting reforms,” said Robin Xing, Chief China Economist at Morgan Stanley.
As such, it will likely be a bumpy ride for China’s economy over the coming year ridden with periodic setbacks amid a complex transition. Strong policy support however could help achieve a gradual recovery.
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