China Needs Fiscal Boost As Deflationary Pressures Build: Capital Economics

(RTTNews) - A near-term fiscal boost as well as a recovery in fuel prices should reduce some of the immediate deflationary risks in China but structural imbalances are set to persist, Capital Economics' economist Gabriel Ng said. Consumer price inflation softened to 0.4 percent from 0.6 percent in August, data from the National Bureau of Statistics revealed Sunday. The consumer price index remained flat on month.

Core inflation, which excludes volatile food and energy prices, weakened to 0.1 percent, the lowest since early 2021.

Another report from the NBS showed that producer price deflation deepened in September. Producer prices declined 2.8 percent annually, following a 1.8 percent drop in the prior month.

Over the weekend, the Ministry of Finance pledged more support to the property market and also to indebted local governments.

As the MoF committed to use the existing funds to ramp up fiscal spending in the fourth quarter and hinted at an expansion of the budget deficit next year, this should support domestic demand and therefore alleviate near-term deflationary pressures, the economist noted.

However, with fiscal support still largely focused on investment rather than consumption, it is unlikely to resolve the underlying structural mismatch between supply and demand, the economist added.