With the implementation of policy measures aimed at stabilizing investment, consumption, employment, and expectations, China’s economy will return to a reasonable level. Photo: TUCHONG

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China witnessed a downturn in the Consumer Price Index (CPI) in July, 2023, followed by a sustained period of low-price operation. The annual CPI increased by a mere 0.2%, with the core CPI rising by 0.7%, both falling short of the targeted 3% and market projections. This downward trajectory in prices has sparked concerns, with fears that prolonged low prices for consumer goods will dampen demand, weaken economic growth prospects, and, consequently, diminish corporate profits and investment appetite. Despite this, as enterprise production and institutional costs remain unchanged, investment willingness has further declined, leading to reduced hiring and inventory, exacerbating resource underutilization and unemployment, and ultimately resulting in economic stagnation.

Structural and short-term features

Like previous downward cycles in prices, the present low-level operation of the overall price level stems from fluctuations in economic growth rates. Influenced by the COVID-19 pandemic and global conditions, domestic effective demand has faltered, leading to dwindling consumption and investment, as well as reduced profits in the industrial manufacturing sector, all of which are reflected in the overall price level. Yet, upon comprehensive analysis of the causes and extent of this low-level operation, it becomes apparent that its trajectory exhibits distinct structural and short-term characteristics.

Currently, one of the primary factors contributing to the downward trend in the overall price level, which is lower than anticipated, is the decline in food prices, particularly essential commodities such as pork. Owing to previous oversupply, pork prices have consistently faced downward pressure. Data indicates that in 2023, the total number of pigs slaughtered in China reached 726.62 million, an increase of 3.8% year-on-year, reaching the highest level in nearly 20 years; the total output of major livestock and poultry meats reached 96.41 million tons, also the highest in nearly 20 years. This substantial supply surge has led to a significant and sustained decline in domestic pork prices. According to calculations by the National Bureau of Statistics, the contribution of food to CPI was -0.75% in October 2023, compared to 1.26% in the same period in 2022. The low-level operation of food prices is the key factor in the current downward trend in the overall price level.

Changes in international input factors represent another significant influence on fluctuations in the domestic overall price level. On one hand, the supply of major international major commodities such as grains and energy is gradually stabilizing. Favorable weather conditions and production conditions in key producing regions, alongside the restoration of transportation channels in critical areas such as the Black Sea, have ensured a relatively ample international grain supply. According to forecasts by the International Grains Council, grain harvests and stock levels will reach historic highs in 2024, leading to a stable decline in prices. Recently, the prices of global wheat futures have fallen sharply, with a decrease of nearly 21%; corn futures prices have fallen by about 31%, marking the largest decline since 2013, ending years of continuous upward momentum; soybeans, which China needs to import in large quantities, have also seen significant price declines. The impact of OPEC production cuts and the ongoing Russia-Ukraine conflict has diminished, and, coupled with the slow global economic recovery and increased U.S. energy exports, the prices of bulk commodities may remain stable or decline moderately. According to statistics, the price of Brent crude oil fell by 10.32% per barrel in 2023, and the price of West Texas Intermediate crude oil on the New York Mercantile Exchange fell by 10.73%, both marking the largest annual decline since 2020. Absent major geopolitical events and significant adjustments in the international energy consumption pattern, there is no support for a sustained increase in international commodity prices. On the other hand, in response to high inflation, major central banks in the United States and Europe have had to frequently adjust their monetary policies, leading to a significant decline in inflation levels. This objectively reduces the input impact on changes in the domestic overall price level.

In summary, the staged decline in economic growth, coupled with the ongoing recovery phase of investment and consumption, along with oversupply of important commodities such as pork and the downward trend in international commodity prices, constitute significant factors contributing to the low-level operation of the overall price level. These factors exhibit clear stage-specific and short-term characteristics.

From the historical trends in fluctuations of China’s overall price level, it can be observed that low-level operation of prices exhibits a certain degree of inertia, albeit with relatively limited duration. Several past downward cycles serve as typical examples: in February 1998, domestic CPI experienced negative year-on-year growth over two years before gradually rebounding above reasonable levels. In September 2001, CPI growth shifted from positive to negative and remained so for about a year and a half. In 2009, influenced by the international financial crisis, CPI turned negative again, turning positive again after nine months. This indicates that as the macro-control measures of the Chinese government gradually mature, the duration of low-level operation cycles is shortening. Moreover, accumulated policy experience in addressing low-level price operation has enabled the government to conduct targeted adjustments effectively.

Stable development 

The overall price level is a reflection of the changes in supply and demand patterns and is an outcome of macroeconomic operations. China’s economy overall maintains a trend of rebound and improvement. From the perspective of industrial operation, in 2023, the value-added of industries above a designated size increased by 4.6% year-on-year, and the production of key industries overall improved, with 28 out of 41 major industrial categories maintaining growth. The top ten key industries are basically stable, with an average growth rate of over 5%, higher than the average growth rate of value-added in industries above a designated size nationwide. In terms of consumption, online consumption has grown rapidly, effectively driving the recovery of domestic demand. In 2023, the cumulative business volume of China’s express delivery industry reached 132.07 billion pieces, an increase of 19.4% year-on-year, continuously breaking records. Regarding employment, from January to November 2023, the number of newly employed urban residents was 11.8 million, an increase of 350,000 year-on-year, indicating an obvious improvement in employment conditions. In terms of monetary supply, the M2 balance and the stock of social financing both saw year-on-year growth rates of 9.7% and 9.5%, respectively, maintaining rapid growth. From the perspective of economic recovery, China’s gross domestic product exceeded 126 trillion yuan in 2023, showcasing remarkable performance on the global stage. In addition, the low base effect in 2023 will have an impact on the future trend of the overall price level. In 2023, the decline in the PPI of China’s industrial producers and the weak rise in CPI year-on-year were also important reasons. Unlike the high base effect faced by prices in 2023, the corresponding base in 2024 is relatively lower. This will provide support for a slight rebound in inflation levels.

Stable operation 

From a long-term perspective, the factors influencing the operation of the overall price level in China and their long-term trends have not fundamentally changed. Therefore, there is no indication of a fundamental shift towards prolonged deflation similar to what Japan experienced. 

First, the overall price level is a comprehensive manifestation of economic growth and income changes. According to estimates, China’s potential economic growth rate is about 5.5% to 6.5% at the present stage. With the economy maintaining a growth trend and macroeconomic policies stable, the overall price level will inevitably remain at a reasonable level.

Second, important commodities such as food and energy remain in a state of “tight balance” in terms of supply, providing support for long-term price stability. Currently, China’s grain production capacity continues to increase, achieving the strategic goal of “ensuring absolute food security and basic self-sufficiency in grains.” However, the overall supply and demand remain in a “tight balance” state. With the accelerated progress of industrialization and urbanization, the consumption structure of residents’ food will continue to upgrade, potentially leading to further increases in demand for grains and a long-term supply-demand gap. Similar to food security, China also faces a demand gap in energy supply. According to statistics, China’s foreign dependence on crude oil reached 71.2% in 2022, and that of natural gas exceeded 40%. The “tight balance” pattern in grain and energy supply will provide important support for price formation.

Finally, the rise in prices of service commodities will become an important factor influencing the future overall price level. In contrast to the “large quantity and low price” characteristics of the service industry, prices for service commodities such as elderly care and education continue to rise. Against the backdrop of an aging population and the frequent occurrence of seasonal diseases, the proportion of residents’ expenditures on medical care, elderly care, and other services continues to increase, becoming an important factor affecting the rise in residents’ living costs. 

The impact of the rise in prices of service commodities on the overall price level should be analyzed from both positive and negative perspectives. On one hand, the rise in prices of service commodities helps promote structural reforms on the supply side of service commodities, continuously enriching the variety and quality of service commodities and promoting the improvement of residents’ welfare. On the other hand, the rising proportion of service commodities in total expenditures may also increase the living costs for residents, especially for low-income groups. 

Policy coordination 

Despite the clear stage characteristics of the current low-level trend in the overall price level, problems such as insufficient demand still require high attention. Since 2023, important meetings of the Central Committee of the Communist Party of China and the State Council have made significant deployments on this issue, releasing positive signals, managing expectations, and taking multiple measures to expand social total demand.

From the focus of policy deployments, the emphasis is on promoting consumption and expanding investment. According to historical trends in month-on-month data, the first and third quarters of each year are peak periods for the rise in the overall price level. Therefore, since 2023, various regions across the country have successively introduced various policy measures to vigorously develop digital consumption, green consumption, health consumption, smart consumption, and “national trend” consumption, promoting the upgrading of residents’ consumption. During the Spring Festival holiday in 2024, the number of tourists at key cultural and tourist attractions nationwide reached 123 million, an increase of 22.8% over the same period in 2023; during the New Year’s shopping blitz from January 18 to February 6, national online retail sales approached 800 billion yuan, an increase of 8.9% compared to the same period of the lunar year in 2023.

Stabilizing expectations 

Effectively guiding investment and consumption in key sectors lays a robust groundwork for stabilizing market expectations and fostering a rational resurgence in the overall price level. Presently, the landscape of consumption is evolving with durable consumer goods sales picking up momentum and emerging sectors like cultural tourism and sports becoming new consumption hotspots. Nationwide, investment in pivotal sectors maintains a brisk pace, with high-tech industries spearheading economic growth. The seamless execution of measures to bolster expectations will further amplify domestic demand and stabilize the economy, consequently inducing corresponding shifts in the overall price level.

While vigilance towards short-term fluctuations in the overall price level and ensuring stable market expectations is crucial, it is imperative to underscore the establishment of a pricing policy framework attuned to the demands of high-quality development in the new era. Aligned with the directives of the Fifth Plenary Session of the 19th CCCPC and the Outline of the 14th Five-Year Plan, the overarching objective of deepening pricing mechanism reforms in China by 2025 is to institute a pricing policy system calibrated to the requirements of high-quality development. 

He Dexu is director of the National Academy of Economic Strategy at the Chinese Academy of Social Sciences, and Wang Zhenxia is director of the Editorial Department of Finance & Trade Economics.

Edited by WENG RONG