Tai Hui

Macroscope | China’s property sector, not deflation risk, is its top economic worry

China’s consumer price index falling for the first time since 2021 has raised fears of deflation, but a closer look at the data paints a different picture

Weak home sales and large developers’ ailing finances are weighing on the property sector as policymakers try to revive spending but keep housing affordable

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An advertisement for an apartment for sale is posted on a telegraph pole in a residential compound in Hegang city in northeastern China’s Heilongjiang province on July 4. Retail sales data in July showed that Chinese consumers were still spending in sectors such as catering, but they are cutting back on housing-related spending. Photo: AFP

Tai Hui

Published: 6:15am, 19 Aug 2023Updated: 6:35am, 19 Aug 2023

The global economy has struggled with high inflation in the past two years. A combination of recovery from the Covid-19 pandemic, generous government spending and higher food and energy prices arising from Russia’s invasion of Ukraine all contributed to this problem. Most central banks were forced to raise interest rates aggressively to tame price increases.

China has been the odd one out so far. In fact, its consumer price index fell by 0.3 per cent year on year in July, the first negative reading since February 2021. This prompted concerns that China is falling into deflation, but a closer look at the inflation data shows a more complicated story and the challenges facing the Chinese economy.

A simplistic way of thinking about falling prices is that they are brought by weak consumer demand and more stimulus is needed from the government and the central bank. However, this is not entirely what the latest inflation data shows.

The drop in prices in July was largely brought by a decline in food and energy prices. Pork prices dropped 26 per cent year on year in July and automotive fuel declined by 13.2 per cent.

Removing food and energy components from the inflation calculation, core inflation actually rose 0.8 per cent compared with a year ago, the largest increase since this January. Travel services also saw a sharp rise in prices, up 13.1 per cent year on year, given the holiday season.

Retail sales data in July showed that consumers were still spending in sectors such as catering, but they are cutting back on housing-related spending. If people are not moving into new homes, they are not spending on new furniture or electrical appliances. Beyond household spending, sluggish housing sales meant property developers were struggling to make profits and faced liquidity pressures.