Chen Changhua: Addressing Growth Risks Amid Deflation (AI Translation)

【周刊提前读】陈昌华：应对通缩下的增长风险

China's first-quarter economic data shows a significant focus on GDP growth, with less attention given to the persisting issue of deflation [para. 1]. For Q1 2024, China's actual GDP saw a year-on-year increase of 5.3%, surpassing the annual target of 5%. However, nominal GDP only grew by 4.2%, leading to a GDP deflator decrease of 1.1% year-on-year, which signals deflationary pressures in the economy [para. 1].

The GDP deflator, a broader measure of price changes compared to the CPI and PPI, reflects the overall economic situation across various sectors. The first quarter GDP deflator at -1.1% is the lowest since 2009, indicating entrenched deflation rather than a temporary external shock. This trend resembles the period from 1998 to 1999, where the GDP deflator was negative for nine consecutive quarters [para. 2].

Unlike historical instances where deflation was driven primarily by fluctuations in agricultural and industrial product prices, the current situation sees the service sector also exhibiting deflation. In Q1 2024, the service sector deflator fell to -0.1%, the first negative growth observed since 1993. Out of nine service sub-sectors, five showed negative deflators, one was neutral, and only three experienced inflation below 2%, highlighting widespread deflationary pressures in the service industry [para. 3].

China's Producer Price Index (PPI) has shown negative growth for 18 consecutive months since October 2022. This trend closely mirrors the Industrial GDP Deflator. Historically, during periods from March 2012 to August 2016 and June 1997 to December 1999, the PPI remained negative for extended durations. Currently, 26 out of 40 industrial sub-sectors are experiencing negative PPI growth. The length of this deflationary period is nearing historical episodes of prolonged industrial deflation [para. 4].

Despite the significant deflationary pressures, nominal GDP growth remains the lowest outside of 2020 since China's reform and opening-up period, primarily because the real GDP growth rate at such times often exceeded 7%, allowing for 6%-7% nominal GDP growth, unlike the present scenario [para. 5]. Severe deflation often adversely affects corporate revenue and profits. For example, in 2015, Chinese industrial enterprises' profits fell by 2.3%. Conversely, in Q1 2024, industrial profits grew by 4.3%, but the sustenance of this growth amidst persistent deflation is uncertain. There is also a concern that if deflation spreads further into the service sector, the overall profit situation could worsen, affecting corporate profits, personal incomes, and government tax revenues even if actual GDP growth meets targets [para. 6].

Current deflation is largely due to insufficient aggregate demand. Supply-side data has shown strong growth since late 2023, but demand-side data, like real estate and consumption, is weaker. While electric vehicles and tourism have seen growth post-pandemic, tourism growth is hitting a bottleneck, and real estate sales have notably declined. Other consumption sectors are also growing sluggishly, and investment growth remains subdued [para. 7]. The imbalance stems from years of focusing on high-tech industry development while neglecting overall demand. Export growth is insufficient to absorb the new production capacity in the long run, given China's economic scale. Furthermore, the disparity between China’s manufacturing output and consumption underscores the risk of escalating conflicts with trade partners and increasing domestic deflationary pressures. These dual challenges need to be factored in when formulating future economic policies [para. 8].