10 July 2023
The risk of deflation in China is a real concern, as producers grapple with lower commodity prices and weak demand. If consumers and businesses continue to hold back from spending and investment, it could trigger a self-fulfilling downward spiral in prices. To avoid a third consecutive contraction, a stimulus is becoming increasingly necessary, potentially leading to another surge in commodity prices. However, the scope for policy intervention is limited due to concerns about debt risks. While the government has taken some measures to support the economy, expectations are that any stimulus will be targeted and coordinated rather than massive in size. Nonetheless, if China’s economy and property markets worsen and deflation persists, Beijing may have no choice but to take stronger action.