China's Economy Hits Deflation, CPI Falls 0.3% In July 2023

The world's second-largest economy, China has witnessed deflation as the consumer price index (CPI) dipped by 0.3% for the first since February 2021. This is still better-than-expectation of 0.4% fall. The latest CPI print is likely to signal the need for additional government stimulus when policymakers struggle between a slowdown in the real estate sector and weak trade. Also, in July, the country's producer price index dropped 4.4%, higher than forecasted.

The deflation comes after no change in June 2023, followed by 0.2% and 0.1% print in May and April.

China's inflation has been below 1% since March 2023, before entering deflation in the month under review.

Data citing the National Bureau of Statistics of China revealed that in July 2023, the country's cost of food dropped 1.7% after being on the upside for the prior 15 months, while non-food prices were flat. Cost of clothing stood at 1%, housing at 0.1%, health at 1.2%, education at 2.4% and transport inflation continued to dive to 4.7%.

As per Trading Economics data, China's statistics agency said a fall in CPI will only be temporary, and inflation is projected to pick up gradually as the impact of a high base last year will fade. Core consumer prices, which exclude prices of food and energy, went up 0.8% yoy, the most since January, after a 0.4% gain in June. On a monthly basis, consumer prices unexpectedly rose by 0.2%, beating forecasts of a 0.1% decrease and marking the first rise in 6 months.

Gary Ng, Asia Pacific senior economist at Natixis told Reuters "For China, the divergence between manufacturing and services is increasingly apparent, meaning the economy will grow at two speeds in the rest of 2023, especially as the problem in real estate re-emerge."

ALso, the economist added that "it also shows China's slower-than-expected economic rebound is not strong enough to offset the weaker global demand and lift commodity prices."

China's Shanghai Composite Index fell by 0.5%, however, Hong Kong's Hang Seng recovered early losses to rise over 0.3%. Asian shares traded on a mixed note with South Korea's KOSPI index outperforming with over 1.2% upside. Japan's Nikkei 225 also shed 0.5%.

On the domestic front, Sensex ended 65,995.81, up by 149.31 points or 0.23%, while Nifty 50 surged by 61.70 points or 0.32% to end at 19,632.55.

According to Vinod Nair, Head of Research at Geojit Financial Services, the domestic market started adopting a defensive stance as investors awaited crucial inflation data for both India and the US. The deflationary trend in China and the downgrade of the US mid- and small-sized banks affected the market sentiment. However, a late recovery in the domestic market was supported by a positive uptick in the European market and hope of an optimistic RBI policy not impacting domestic economic growth.