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China Economy Situation

Monetary policy decisions in the US and Europe have amplified uncertainties for China and the rest of the world. China's consumer price index rose by a scant 0.8 percent in January, down from a 1.5 percent increase in December and marking the smallest increase in consumer prices in some five years.

In China, there's deflation in factory prices, which have fallen continually for two and a half years, and the increase in the consumer price index (CPI) has slowed to 1.4%, the lowest since the 2009 global recession.

Some of the reasons mentioned included falling global commodity prices and over-capacity in Chinese industry. Patrick Chovanec pointed to the spare capacity in a variety of businesses that could contribute to lower producer prices.

And structurally, China's growth is slowing down as it matures and changes from an investment-led to a consumer-led economy.

It looks like the downward pressure on prices in China isn't another cyclical blip similar to when China experienced a couple of years of outright deflation after the Asian financial crisis.

Due to current economic conditions in China, it is widely believed that financial policymakers will reduce interest rates and banks' deposit cushions again in the first half.

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The Spread of Deflation in China
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