China’s worst deflation was in industry as supply glut persisted
China is experiencing entrenched deflation, which reflects chronic weakness of domestic demand in contrast with robust production
CHINA’S deflationary pressures were most severe in its industrial sector for a second straight year, in a sign of a deep imbalance between supply and demand that’s driving prices lower across the economy and inflaming trade tensions.
Industry, which mainly consists of manufacturing, recorded a 2.3 per cent fall in prices last year, the steepest drop among all sectors, according to Bloomberg calculations based on official data published on Saturday (Jan 18). Real estate and transportation trailed closely behind.
The world’s second-largest economy is experiencing entrenched deflation, which reflects chronic weakness of domestic demand in contrast with robust production. The gross domestic product deflator, the broadest measure of prices, dropped 0.8 per cent last year. It is expected to decline again in 2025 for the third straight year, which would be the longest streak in decades.
Intense competition between factories – which make up 80 per cent of the industrial sector – has pushed export prices lower and squeezed companies’ profit margins. That’s boosted overseas shipments and led to a record trade surplus of nearly US$1 trillion last year, prompting a wave of protectionist countermeasures across the globe.
After industry, the real estate sector contributed the most to the economy’s deflation in 2024 as a years-long property market downturn dragged on. It stabilised only after Beijing’s stimulus blitz in late September, with official data recording the first expansion in seven quarters in the October to December period.
The improvement likely reflected a rebound in housing sales in the final two months of the year. Other property-related activities such as investment continued to decline, weighing on the growth of construction and other sectors.
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“For the housing sector as a whole, it is still too early to call a turning point yet,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered.
China’s statistics bureau revised up the size of GDP in 2023 by 2.7 per cent after an economic census concluded in December, a change partly attributed to an adjustment in methodology.
The new method estimates the value of housing services of owner-occupied homes based on rents charged for similar properties.
The National Bureau of Statistics said it’s in line with the practice of major economies and better reflects the country’s development compared to the previous approach, which estimated the value of housing services based on the cost of owning and maintaining the property.
When adjusted for deflation, China’s economy met the official target of around 5 per cent last year thanks to the policy pivot and export boom. But nominal GDP, which reflects price changes, expanded only 4.2 per cent, the slowest since the economy opened up in the late 1970s barring a pandemic slump in 2020.
Beijing is expected to use its fiscal firepower in the coming months to offset trade headwinds from President Donald Trump after he takes office on Monday.
China’s so-called secondary sector, made up of industry and construction, expanded 5.3 per cent in 2024. Excluding the pandemic years, that was the first time since 2012 that it grew at a faster pace than the tertiary industry – consisting of services and logistics – which had a gain of 5 per cent. BLOOMBERG
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