Beijing's Challenge: Deflationary Pressures and Economic Stimuli

China's insatiable deflationary pressures intensified in September, which was reflected in weaker consumer and factory prices. This increases the pressure on Beijing to develop a more comprehensive package of measures to strengthen the economy. While China's volatile markets eagerly await detailed information on Beijing's economic plans, the last press briefing by the Ministry of Finance on Saturday was not particularly productive. The announcement of increased spending came without significant new figures. According to the National Bureau of Statistics, the consumer price index rose by only 0.4 percent compared to the previous year, falling short of the expected 0.6 percent and also showing a decline since August. More significant is the acceleration in the decline of the producer price index, which fell by 2.8 percent – the steepest drop in six months, primarily driven by ferrous metals smelting and refineries. Goldman Sachs noted that consumer prices were supported by rising food prices, triggered by unfavorable weather conditions and seasonal demand. This occurred ahead of the Golden Week holidays, which began on October 1. The weak inflation report highlights the challenges China faces, stemming from a deep crisis in the real estate sector affecting household savings. Combined with a bifurcated economy where strong trade growth is overshadowed by weak GDP numbers in the third quarter, analysts are examining the potential consequences. Economists anticipate that GDP growth in the third quarter will be less than the official target of 5 percent. If China's export engine falters, possibly due to protectionist measures by its trading partners, more action will be demanded from policymakers. The People's Bank of China implemented a more vigorous monetary policy at the end of September, which prompted an upward movement in the country's long-stagnant stock market. Investors now desire more detailed plans for additional fiscal support. Market participants agree that broad credit issuance should be avoided to prevent unwelcome real estate bubbles. The upcoming session of the National People's Congress, where additional budget expenditures might be announced, is therefore eagerly anticipated.