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Chinese economy falls into deflation as recovery stumbles

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China’s economy has fallen into deflation as consumer prices contracted for the first time in more than two years, in one of the starkest indicators of the challenges facing policymakers as they struggle to revive consumption.

The consumer price index fell 0.3 per cent year on year in July, compared with no change a month earlier. The producer price index, a gauge of prices as goods leave factory gates, was down 4.4 per cent in July.

Consumer prices, which last slipped into negative territory in February 2021, have been on the brink of deflation for months as China’s economic momentum failed to rebound as strongly as expected after authorities lifted pandemic restrictions at the beginning of the year.

The move into deflation is set to fuel calls for more government stimulus at a time when policymakers are also confronting a property sector slowdown and weakness in trade.

Data released on Tuesday showed July exports slumped 14.5 per cent year on year, the steepest fall since the start of the pandemic.

“The Chinese economy is now at serious risk of sliding into a deflationary episode that could spark a self-reinforcing downward spiral in growth and private sector confidence,” said Eswar Prasad, a China finance expert at Cornell University.

The Chinese government has targeted an average inflation rate of 3 per cent over the course of 2023, highlighting the growing divergence between official expectations and the reality on the ground.

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