China's risk of deflation is 'serious' — one economist says it's 'time to act'

Fears are increasing that China's system is tethering connected the verge of deflation aft different slate of underwhelming economical data provided much grounds of stagnating growth, renewing calls for much meaningful argumentation intervention.

On Monday, Beijing announced that GDP for the 2nd 4th grew 6.3% from a twelvemonth ago, missing marketplace expectations for 7.3%. This also marked a 0.8% maturation from the archetypal quarter, slower than the 2.2% quarter-on-quarter gait recorded successful the archetypal 3 months of the year.

"We request to spot wide and persistent terms unit earlier we tin state deflation," said Hong Hao, Grow Investment Group's main economist. "This is happening successful the upstream sectors and it usually takes 2 to 4 quarters to walk down."

"I deliberation we are connected the verge of deflation. Now it's the clip to enactment to stem the deflationary pressure," helium added.

Hong pointed to authoritative information past week showing that China's shaper prices fell 5.4% successful June from a twelvemonth earlier and slipped 0.8% from a period agone — falling beneath analysts' expectations. The yearly diminution successful June was China's ninth consecutive driblet and its steepest since December 2015.

Annual user terms ostentation was level successful June — driven by a 7.2% driblet successful pork prices — missing Reuters' expectations for a 0.2% emergence and weaker than the 0.2% emergence successful May. 

The People's Bank of China pushed backmost connected the deflation thesis past week.

"At this clip determination is nary deflation, and determination volition beryllium nary hazard of deflation successful the 2nd fractional of the year," Liu Guoqiang, lawman politician of the PBOC, told reporters past week. He pointed to factors specified arsenic China's economical betterment and maturation successful wealth supply.

Chinese banks extended 1.81 trillion yuan ($258.23 billion) successful caller yuan loans successful June, up 22% from May.

Still, immoderate economists are pointing to different indicators.

"Nominal GDP maturation turns retired to beryllium little than existent GDP maturation successful Q2, the archetypal clip since comparable information are disposable successful Q4 2016," said Zhang Zhiwei, Pinpoint Asset Management's president and main economist. "This indicates that hazard of deflation is serious."

Nominal gross home merchandise measures economical enactment without accommodation for inflation.

Economists astatine Citi and Macquarie besides flagged the hazard of sagging prices successful the world's second-largest system pursuing Monday's release.

However, Macquarie economists Larry Hu and Yuxiao Zhang characterized the information successful China arsenic disinflation — a impermanent slowdown of rising prices — alternatively than deflation, which refers to a much superior occupation wherever there's a persistent alteration successful prices implicit time.

"Disinflation unit is evident, arsenic nominal GDP maturation slowed to 4.8% twelvemonth connected twelvemonth successful 2Q from 5.0% successful 1Q. It's the archetypal clip since the 2nd 4th of 2020 that the GDP deflator has turned negative," Hu and Zhang wrote successful their appraisal of Monday's information release.

A raft of different June information person pointed to a anemic prognosis. Even though top-line fixed plus concern and concern output figures marginally exceeded marketplace expectations, determination was a worrying deepening diminution successful spot investment.

Even with a debased basal from past year, fixed the Covid lockdown successful Shanghai, retail income slowed to 3.1% successful June from a twelvemonth before, compared to 12.7% successful May.

Monday's disappointing information triggered different slew of downgrades by Wall Street banks, including Barclays, Citi, Morgan Stanley and JP Morgan.

Economists chopped their forecast for China's yearly growth, underscoring the extent of the exuberance connected China's economical betterment erstwhile it emerged from strict zero Covid curbs precocious past year.

Citi, Morgan Stanley and JP Morgan present expect China's yearly maturation people this twelvemonth to travel successful astatine 5%, portion Barclays trimmed its forecast from 5.3% to 4.9%.

— CNBC's Evelyn Cheng contributed to this report.