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China's Consumer Prices Expected to Decline before Recovering, Says Deputy Governor of People's Bank of China
Consumer Prices in China on the Decline due to Softened Growth
China's consumer prices are predicted to decrease in July before making a recovery, according to Liu Guoqiang, the deputy governor of the People's Bank of China. This decline is attributed to softened growth and weak demand. However, Liu reassured that this decrease is only temporary and that there is no risk of deflation in the second half of the year. Factors such as China's economic recovery and money supply growth will prevent deflation.
New Bank Loans Surpass Analyst Expectations
New bank loans in China for June grew more than expected by analysts. This indicates that there is some level of confidence in the market and that financial institutions are providing support amid the economic recovery.
Recovery of Consumer Prices Expected by the End of the Year
The People's Bank of China had previously stated that consumer prices would likely see a U-shaped recovery this year. Liu reiterated this forecast and mentioned that he anticipates consumer price increases to reach around 1% by the end of the year. China reported no change in consumer prices for June from a year ago, but excluding food and energy, consumer prices rose by 0.4%.
Real Interest Rates in China and the United States
China's real interest rate currently stands above 3% when considering a Consumer Price Index (CPI) of 0% and a market benchmark lending rate of 3.55%. Meanwhile, the United States has a real interest rate of approximately 0.5% with a core inflation of about 4.5% and a lending rate of above 5%. Due to these differences, some analysts believe that China should consider reducing its interest rates to stimulate economic growth.
Policies in Place to Support China's Economic Recovery
China's economic recovery from the pandemic has experienced setbacks in recent months, with factors such as lackluster retail sales, a property market slump, and plummeting exports. The People's Bank of China remains confident in the effectiveness of the policies that have been implemented to support the economy's stable growth. However, they acknowledge that it will take time for the economy to fully recover, estimating a year for complete recovery.
China's GDP Target and Debt Concerns
China has set a GDP target of around 5% for the year, which is lower compared to the forecasts by most institutions. The government is cautious about implementing large-scale stimulus measures due to soaring debt levels, particularly for local governments. These debt levels have diminished the ability to repay loans. In an effort to support the real estate sector, measures announced in November have been extended until the end of 2024. Developers are also turning to commercial bank loans, indicating the stability of the real estate market.
China's Focus on Strengthening the Domestic Tech Industry
As a response to U.S. sanctions, China is aiming to bolster its domestic tech industry to support economic growth and ensure self-sufficiency. The State Council has passed a plan for strengthening support for tech companies' financing. The People's Bank of China's Liu mentioned that this plan includes external support and the use of international capital markets.
The expected decline in China's consumer prices followed by a recovery can have both positive and negative implications for new businesses operating in the country. On the positive side, the recovery of consumer prices by the end of the year indicates a gradual revival of purchasing power among Chinese consumers. This could create opportunities for new businesses to tap into a market that is slowly regaining its confidence.
Furthermore, the surpassing of analyst expectations for new bank loans suggests that financial institutions are actively providing support amid the economic recovery. This availability of loans can benefit new businesses by offering them access to capital for expansion, investment, or innovation.
However, the uncertainty surrounding China's economic recovery and the cautious approach taken by the government may pose challenges for new businesses. The setbacks in retail sales, property market slump, and plummeting exports indicate a still fragile and uncertain business environment.
Additionally, concerns over soaring debt levels, particularly for local governments, may limit the availability of large-scale stimulus measures. This could impact the overall business climate, including the ease of obtaining loans and the stability of market conditions.
Moreover, China's focus on strengthening the domestic tech industry as a response to U.S. sanctions may create competition for new businesses operating in the technology sector. While the plan includes external support and the use of international capital markets, it could potentially favor established tech companies over newcomers.
Overall, new businesses need to carefully evaluate the evolving economic landscape in China and adjust their strategies accordingly. While there are opportunities arising from a recovering consumer market and available bank loans, the challenges posed by a fragile economic recovery and government policies should not be overlooked.Article First Published at: https://www.cnbc.com/2023/07/14/chinas-central-bank-says-consumer-prices-will-likely-drop-in-july.html