Beijing, China – China’s central bank remains optimistic as it expects the country to avoid deflation this year despite recent declines in consumer prices. Liu Guoqiang, the deputy governor of the People’s Bank of China (PBoC), emphasized the importance of patience during the post-pandemic recovery phase and projected a rebound in consumer prices by August.

Official data released this week revealed that consumer prices in China remained flat in June compared to the previous year, while exports experienced a significant decline. However, Liu stated that consumer prices are expected to weaken in July before recovering and approaching a 1% growth rate by the end of the year.

Liu assured reporters in Beijing that China’s economy is not facing deflation risks in the second half of the year. He attributed the temporary decline in consumer prices to the gradual recovery of demand and base effects. Additionally, he pointed out positive factors such as China’s economic recovery and growth in money supply that contribute to the avoidance of deflation.

While China’s economy continues to face challenges, Liu expressed confidence in the country’s long-term recovery. Financial indicators, including measures of money supply and household incomes, indicate a solid foundation for sustained economic growth. Liu acknowledged that economic turbulence during the post-pandemic recovery is normal and emphasized the need for patience.

The central bank is prepared to address any unexpected challenges by utilizing various policy tools, including potential cuts in the reserve requirement ratio, which would release additional cash for banks. Liu reassured that the central bank has ample policy space to manage unforeseen circumstances effectively.

As China prepares to release its second-quarter gross domestic product (GDP) figures, analysts will closely monitor the data for insights into the country’s economic health and potential stimulus measures. China’s GDP target for the year is around 5%, and the central bank’s assessment of consumer prices will play a crucial role in determining the need for further policy adjustments.

The anticipation of a consumer price decline in July holds implications for China’s monetary policies. If inflationary pressures ease, the central bank may consider adjusting its policies to support economic stability and growth. Monetary measures, such as interest rate adjustments and liquidity management, will be instrumental in maintaining a balance between price stability and sustainable economic development.

While China faces ongoing challenges in its economic recovery, policymakers remain committed to strengthening support for key sectors, such as real estate and the domestic tech industry. The government’s extension of support measures for the real estate sector until the end of 2024 demonstrates its efforts to stabilize the market and ensure timely delivery of completed properties to homebuyers. Additionally, China aims to enhance support for tech companies by exploring financing options, including utilizing international capital markets.

As China navigates the complexities of post-pandemic recovery, policymakers are cautiously monitoring consumer prices and implementing measures to sustain economic stability and growth. The central bank’s proactive approach and policy flexibility will play a crucial role in mitigating risks and fostering a favorable economic environment in the coming months.

By: Montel Kamau
Serrari Financial Analyst
14th July 2023

Photo Credit: CNBC