The Bank of Korea Says "Low Possibility of Deflation in China... But Domestic Demand Recovery May Be Delayed"

The Bank of Korea recently stated that while the possibility of actual deflation in the Chinese economy, which is experiencing a continued low inflation trend, is not high, a prolonged low inflation situation could weaken the expectations of economic agents, potentially delaying the recovery of domestic demand such as consumption and investment.

On the 6th, the Bank of Korea explained this in its Overseas Economy Focus report titled "Second Half Outlook for the Chinese Economy and Key Issues," saying, "Some in the financial market have raised concerns about the possibility of deflation as prices continue to fall amid China's economic downturn."

In June, China's consumer price inflation rate (year-on-year) was 0%, lower than the market expectation of 0.2%. Food prices rose compared to the previous month due to higher fresh vegetable prices caused by high temperatures, but non-food prices (-0.6%), consumer goods prices (-0.5%), and service prices (0.7%) either saw larger declines or smaller increases.

Producer prices have been falling for nine consecutive months since October last year (-1.3%). The decline has gradually widened since December last year (-0.7%), reaching -5.4% in June. This was influenced by larger declines in prices of consumer goods (-0.5%) and producer goods (-6.8%).

The Bank of Korea explained that the decline in China's consumer prices is mainly due to the lingering scar effects from unemployment and income reductions experienced during the COVID-19 period, which have weakened consumer sentiment.

It added, "As employment conditions for the youth continue to be poor, not only has consumption slowed, but housing demand has decreased and rental prices have fallen. The slowdown in the rise of food prices is mainly due to weak prices of pork and other items, while the decline in non-food prices was also affected by the prolonged downward trend in producer prices."

Additionally, the fall in international oil prices lowered fuel costs for transportation, and promotional price discounts to boost automobile sales also exerted downward pressure on consumer prices.

Regarding producer prices, concerns about economic slowdown in major countries led to a drop in international oil prices, while infrastructure investment slowed and the real estate market downturn deepened, significantly impacting prices. Structural overproduction issues were also analyzed as a major cause of the decline in prices of manufactured goods.

The Bank of Korea assessed that since the Chinese government is expected to introduce stimulus measures to revive the economy, the likelihood of entering actual deflation is low.

The Bank of Korea explained, "Financial markets expect the Chinese government to strengthen fiscal and monetary policy support for the real economy in the second half of the year to achieve this year's economic growth target (around 5%). Supported by this, incomes of economic agents are expected to increase, and the structure of assets and liabilities will improve, leading to increased consumption of not only services but also durable goods."

However, the Bank of Korea added, "It should be noted that if the low inflation situation persists for a long time, it could weaken the expectations of economic agents, further delaying the recovery of domestic demand such as consumption and investment."

The Bank of Korea analyzed, "Although the decline in producer prices is expected to gradually narrow due to rising international oil prices and weakening base effects from the previous year, the downward trend is likely to continue for the time being. Despite policy support from the Chinese government to stabilize employment, youth unemployment is a structural problem that is unlikely to improve significantly in the short term, which is expected to exert downward pressure on consumer prices."

This content was produced with the assistance of AI translation services.