China Grapples With Deflation As Reopening Efforts Falter: El-Erian Says CPI Data 'Deepens Worries'

China’s post-reopening growth is failing to inspire confidence, and recent economic data released on Wednesday further confirmed this sluggish trend. 

What Happened: The Chinese National Bureau of Statistics unveiled that China’s annual consumer price inflation turned negative for the first time since February 2021. 

In July, consumer prices experienced a 0.3% year-over-year decline, though this wasn’t as severe as the anticipated 0.4% drop forecasted by surveyed economists from Reuters. In comparison, June saw a neutral 0% annual inflation. 

On a monthly basis, consumer prices managed a modest 0.2% increase in July. Meanwhile, the slide in producer prices, reflecting wholesale-level costs, continued with the PPI index showing a 4.4% year-over-year contraction in July. 

This decline was an improvement from the steeper 5.4% fall recorded in June. ANZ’s senior China strategist, Xing Zhaopeng, interpreted the data as a confirmation of economic deflation, highlighting the challenges in steering monetary policy. 

This is further complicated by the call for a stable yuan exchange rate from the Politbureau meeting, potentially conflicting with efforts toward monetary policy easing.

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Why It's Important: Noted economist Mohamed El-Erian echoed a similar sentiment. “These numbers will deepen worries about China's growth prospects and the effectiveness of traditional stimulus measures,” he said in a post on social media platform X.

Trade data released by China on Tuesday showed steeper-than-expected declines in both imports and exports in July.

China is the world's second-largest economy and is often considered the world's factory, given the country's manufacturing efficiency and cheap labor costs. A setback to China will likely have ramifications for the global economy as well.

China’s Shanghai Composite Index languished in negative territory following the release of the data. The iShares MSCI China ETF MCHI, an exchange-traded fund that tracks the performance of China stocks available for trading by overseas investors, ended Tuesday’s session at $46.73, down 1.60%, according to Benzinga Pro data. For the year-to-date period, it is down a marginal 0.3%.

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