The ‘New Normal’ for the Chinese Economy

In his testimony during the Asia-Pacific Economic Cooperation summit, Chinese President Xi Jinping declared that a ‘new normal’ has emerged for China. Here’s a quick review of this week’s set of economic figures from the world’s second largest economy:

Inflation

weak inflation chinaOn the surface, inflation doesn’t seem to be so bad since the October CPI reading stayed unchanged at 1.6% as expected. Looking back at previous inflation figures, however, reveals that annual CPI is at its five-year low and may fall further.

The producer price index (PPI), which is usually considered a leading indicator of overall inflation, chalked up a worse than expected 2.2% decline versus the projected 1.9% drop for October. Heck, producer prices have been tumbling for nearly three years already, prompting market analysts to speculate that deflation might soon take hold in China.

Industrial Production

Chinese industrial production hasn’t been faring so well also, with output showing an annualized 7.7% increase, short of the 8.0% forecast. This marks China’s second slowest pace of production since the height of the global financial crisis in 2009. Falling price levels and weak global demand have been the usual culprits for the ongoing slump in output, along with production restrictions on pollution-heavy industries.

Spending and Investment

Consumers have cut back their spending as well, as retail sales showed an 11.5% year-over-year gain, down from the previous 11.6% reading. Meanwhile, fixed asset investment, which comprises spending on non-rural roads and properties, is up by a bleak 15.9% so far this year. This reflects a considerable decline from the previous month’s 16.1% increase and is at its lowest level since December 2001.

No wonder market participants have been buzzing about the prospect of PBoC easing! The risk of deflation, combined with slowing production and spending, could force the Chinese central bank to take action and implement stimulus measures to bring the economy back to its glory days of double-digit growth. Given the recent economic data, analysts project that China will expand by only 7% in 2015, short of the growth target at 7.5%.

Chinese officials, however, see no reason to be alarmed. President Xi Jinping even said that the risks facing China are “not that scary” while PBoC officials mentioned that they wouldn’t be flooding the economy with cash just to support growth. “China’s economic growth has become more stable and been driven by more diverse forces,” President Xi explained as he discussed the ‘new normal’ in the Chinese economy.

For as long as Chinese officials can maintain their “Keep calm and carry on” stance, risk-taking might not take such a huge blow just yet. However, once other world leaders start expressing concerns on how the slowdown in China could pose risks to global economic growth, y’all better start booking those tickets on the flight to safety!