Recent economic data, including growth in gross domestic product (GDP), indicates some improvement in China’s economy. However, deflationary pressures continue to persist. This raises concerns about the potential for China’s price weakness to spill over into its export destinations.
In March, consumer price index inflation weakened month-on-month, while producer price index inflation shrank more than expected. The GDP deflator, which covers overall prices in the economy, fell by 1.04% in the first quarter, despite an overall GDP increase of more than 5%.
Analysts at BoFA attribute China’s deflationary trend primarily to a cooling in global commodity prices and easing supply chain issues. While China has exported some disinflation to Europe and Asia, its impact on regional inflation has been limited. Chinese goods represent a relatively small portion of actual final consumption in export markets, and destination countries are grappling with increased service price inflation, which is largely unaffected by export prices.
BoFA analysts also downplay the potential impact of Chinese deflation on Asian economies, despite the close trade ties and geographical proximity. Chinese imports constitute a minor part of final consumer consumption in Asia. The significant drop in inflation witnessed in Asia over the past year is primarily attributed to softer food prices, in which China is not a major exporter. Additionally, cheaper energy prices, primarily due to weaker global oil prices, have contributed to Asian disinflation.
Furthermore, the analysts emphasize that even in sectors heavily exposed to Chinese exports, such as steel and automobiles, the prospect of deflationary effects is minimal. Domestic factors largely overshadow any potential impact from mainland China. They cite Hong Kong as an example, where inflation has remained stable despite its geographical and economic closeness to mainland China, which has experienced almost a year of deflation.
