Insufficient Demand And Weak Consumption: The Dual Challenges Facing Chinese Economy – Analysis

On February 16, China’s National Bureau of Statistics released domestic price data for January 2022. In that month, the national consumer price index (CPI) rose by 0.9% year-on-year (y-o-y), against the expected 1.0%, and down from 1.5% last month. The country’s producer price index (PPI) increased by 9.1% y-o-y (vs. expected 9.5%), down from 10.3% in December. Meanwhile, the industrial producers’ purchase prices rose by 12.1% y-o-y and were down 0.4% compared to last month.

The trends of the two key price indices, CPI and PPI, showed a significant slowdown. The y-o-y CPI has slowed for two consecutive months, falling below 1%. Among them, food prices fell by 3.8%, and non-food prices rose by 2.0%. In food, the price of livestock and meat dropped by 25.6%, affecting the CPI by about 1.11 percentage points, of which, the price of pork fell by 41.6%, affecting the CPI by about 0.96 percentage points.

The PPI has slowed for three consecutive months from a record high, falling below 10%. In PPI, the prices of different industrial products go up and down with each other. On the one hand, international oil prices and non-ferrous metal prices have risen sharply, driving the growth rate of petrochemical industry chains and non-ferrous-related industries to rise. On the other hand, the decline of prices in China’s coal, steel and other industries has slowed down.

ANBOUND’s researchers believe that the slackening in both the CPI and PPI shows that the Chinese economy continues to be in a downward trend. For the year 2022, this is indeed a challenging start. We believe that the continued slowdown in the price index in January is an indication that China’s demand remains insufficient and the consumption recovery is still weak.

In recent years, China’s policies have emphasized supply-side structural reforms. The reality is that the country’s economy has encountered issues both in terms of supply and demand, and the problem on the latter is prominently manifested in the lack of effective demand. From the perspective of investment, the growth rate of its domestic fixed asset investment (excluding farmers) continued to decline in 2021, and the year-on-year investment growth rate was 4.9%. In terms of consumption, the total retail sales of consumer goods in 2021 increased by 12.5% y-o-y, but the total retail sales of consumer goods in December only rose 1.7% y-o-y. The trend of weak consumption throughout the year is therefore rather obvious. Among the trinity of the demand side (i.e., consumptions, investments, and exports), only the growth rate of exports has performed well, which is directly related to the global market driving China’s manufacturing under the COVID-19 pandemic.

Based on last year’s economic patterns, there are enough grounds to be concerned about China’s economic growth in 2022. China’s economy will expand by 8.1 percent in 2021 based on a low starting point, but the economic growth rate in each quarter is clearly high at the start and low at the end, which will have a substantial impact on this year’s economic growth.

Quarterly, this will also form a “low first, high later” trend. As ANBOUND has previously predicted, China should be mindful of the likelihood of a slowdown in economic development in 2022, and it must maintain a particular rate of growth to avert complications. If the growth rate drops too fast, numerous problems in the country’s economic and social development will emerge or worsen. The reasons for maintaining economic stability were repeatedly emphasized by the Chinese authorities last year. The policy goal of “seeking progress while maintaining stability” contains concerns about China’s economy stalling. Overall, stabilizing economic growth is an important political task facing China in 2022.

After the Beijing Winter Olympics, China will usher in the national “Two Sessions”, the annual gatherings of the Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress (NPC) in early March, where economic growth goals will be set. Citigroup’s latest report said it is expected that China may set its economic growth target at above 5% and a deficit rate of 3.2% after the “Two Sessions” this year, and continue to push forward with structural reforms. The economic target for 2021 is “6% and above”, which means that the one of 2022 could be reduced by 1 percentage point. ANBOUND’s researchers have always believed that China’s economic growth should not be lower than 6% at the current stage, but if this year’s target is set at “above 5%”, it indicates that, at least from the standpoint of policy departments, China’s economic growth in 2022 will be difficult to attain at 6%. This would be the major challenge in terms of the economy for China this year.

Final analysis conclusion:

China’s price indices continued to slow in January, an indication that under the impact of the COVID-19 pandemic, there is insufficient effective demand in its domestic economy, and the recovery of consumption is still weak. The inertia of China’s economic growth rate has decreased dramatically since the second half of last year, as seen by the first quarter of 2022. For China, the crucial task of stabilizing growth needs to be continuously implemented, so that the country’s economy growth rate will not be out of control.