(Bloomberg) -- China’s intensifying deflationary pressure threatens to persist long after seasonal distortions fade away, unless the government drains excess capacity in the economy that’s putting pressure on prices.
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Consumer inflation in the year to date has turned negative through January-February for the first time since 2021. While an earlier-than-usual Lunar New Year holiday helped push price growth below zero last month, the downswing was far sharper than predicted, suggesting inflation was feeble even when adjusted for seasonality.
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For global banks like Citigroup Inc. and Nomura Holdings Inc., the worry is that consumer prices could hover near contraction territory for the rest of the year if robust production overwhelms demand at home. As the People’s Bank of China prioritizes yuan stability over monetary easing in the near term, dragging the country out of deflation will likely hinge on the ability of policymakers to tackle overcapacity.
The latest CPI reading “is a pretty good illustration that this deflationary environment is a permanent rather than transitory phenomenon,” said Dan Wang, China director at Eurasia Group. “Overcapacity, plus a relatively conservative monetary stance, would actually prolong this deflation pressure rather than alleviating it.”
Consumer inflation could rebound but only reach near zero in March, according to estimates by Citigroup and Nomura. The consensus forecast for the full year among analysts surveyed by Bloomberg is a 0.7% gain.
Economist estimates for Chinese inflation have consistently overshot the actual readings for the past two years.
The deflationary pressures coursing through the economy showed signs of spreading in February, with a drop in services prices and declining costs of consumer durable goods. China’s core CPI, which excludes volatile items such as food and energy, decreased for the first time since 2021.
Since achieving a sustained revival of consumer confidence could take months, and will depend in large part on whether the property market bottoms out, China’s potential supply-side reform would be key to easing factory deflation, Citigroup economists including Xinyu Ji wrote in a report Sunday.