Myths of China’s Global Inflation, Deflation Risks

In June, China’s consumer prices stayed close to zero, falling behind 0.2% rise in May, according to China’s National Bureau of Statistics. In international media, that was quickly reported as “unexpected flattening” and “missing of market expectations.” 

Barely half a year ago, the same voices that now present China as a global deflation risk were portraying China as a global inflation risk – a concern that itself proved, well, inflated. 

The myth of China as a global inflation risk

When Chinese policymakers began to reopen the economy early in the year, many international observers warned it would unleash inflationary headwinds. Here’s what the pundits assumed would happen: As the world’s biggest factory and the second-largest economy opened for business after three Covid years, they thought it would face an inflationary surge in demand. That, they said, would spark global inflationary pressures. 

In other words, the pundits thought China’s reopening would be a déjà vu of what had happened in the United States and the eurozone. After all, the two had been struggling with elevated inflation ever since their re-opening. 

There was only one problem with that narrative. Numbers didn’t back it up, as I argued in my China Daily op-ed in early March.

Despite Western media hysteria in early spring, China’s annual inflation rate rose to only 2.1% in January. Expectedly, prices of food jumped and those of non-food gained on the back of the Lunar New Year festival and the removal of pandemic measures.

Nonetheless, China’s inflation rate was only half relative to Japan, a third compared with the US and a fourth compared with the eurozone. China as the great global inflation risk turned out to be just a myth.

The myth of China as a global deflation risk

In June, Chinese inflation rate was flat. According to international pundits, it meant that China is facing an impending deflationary crash, or as they headlined the story:

“China on brink of consumer deflation” (Financial Times).

“China’s deflation pressure builds as consumer prices falter” (Reuters)

“Deflation looms in China as rebound loses steam” (Wall Street Journal).

But is China really a global deflation risk? That presumes that Chinese price levels reflect a sustained fall (rather than sustained increase as in inflation); and that such deflation is somehow exported worldwide in a sustained manner.

Here’s the problem: Sometimes simple headlines can illustrate complex realities. But when they represent simplistic generalizations, they misinform rather than enlighten. 

Most pertinently, they do not explain why some inflation components are slowing, others remain flat, and still others are actually increasing.

Data nuances are telling

Despite simplistic headlines, the June data is not unambiguous. Inflation is an aggregate figure with several components. Not every component is telling the same story. 

The June figure was the lowest reading since February 2021, but that was mainly due to a decline in non-food prices (-0.6% vs flat in May) with cost of transport falling further (-6.5% vs -3.9%), while that of education actually slowed (1.5% vs 1.7%). 

Moreover, inflation was stable for health (at 1.1%), whereas prices of housing were unchanged after declining 0.2% previously. Despite a sharp fall in pork prices, food prices actually rose the most in three months (2.3% vs 1.0%), due to the cost rebound in fresh vegetables and eggs. 

Furthermore, fuel price disinflation, a key factor behind subdued headline inflation recently, is likely to wane over the coming months.

What does it all mean, really?

Uncertain times, cost-conscious consumption

China’s e-commerce revolution exploded well before the Covid. But even after the pandemics, many cost-conscious consumers like their e-com promotions and discounts. New technologies support new consumption patterns, but so do the times. After three years of Covid constraints, many consumers are no longer returning to old purchasing patterns. People don’t purchase what they want; they buy what they need. 

After the recent Dragon Boat festival, marketers noticed that domestic tourist traffic soared 113% more than in the pre-pandemic 2019. Yet, tourism revenue, which proved very strong at 95%, fell behind the traffic by almost a fifth. Consumers want to see new sights, but they are more cautious about buying into such things. 

The same lesson explains why gains in food and beverage (F&B) sales in the first five months of the year proved strong, whereas clothing and cosmetics fell or was stagnant. Chinese consumers need to eat and drink, but in uncertain times we all are more discriminate with what and where they eat and drink.  

Coming rebound

In China, there is broad expectation for a slate of measures from the Politburo meeting later in July, when the authorities will review the economic performance in the first half of the year. These measures are likely to be coupled by new fiscal and monetary support.

On Tuesday, Chinese President Xi Jinping promoted efforts to lift the country’s opening-up to a new level. That’s a prelude of things to come.

Inflation and deflation stories aside, China’s economic recovery is likely to strengthen in the second half of the year. 

Dr. Dan Steinbock is an internationally recognized strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute (USA), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see

The original commentary was published by China Daily on May 17, 2023.

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