China faces deepening deflation risks due to excess capacity and plummeting property prices, according to Lazard chief market strategist Ronald Temple. He anticipates that China will “continue to endure” Producer Price Index (PPI) deflation and “flirt with deflationary territory” regarding the Consumer Price Index (CPI) in the short term. Temple doesn’t foresee a sustained positive return for consumer inflation until 2026. Lazard is a global financial advisory and asset management firm that provides advice on mergers, acquisitions, restructuring, capital solutions, and asset management to corporations, partnerships, institutions, governments, and individuals.
Temple pointed out that while CPI edged back into positive territory at 0.2 per cent year-on-year, this rebound is somewhat misleading. He noted that a significant surge of roughly 50 per cent in gold jewellery prices contributed about 30 basis points to the index. Factoring this in, the CPI would have been –0.1 per cent, aligning with expectations, which underscores the underlying deflationary pressures.
He highlighted a growing reluctance among Chinese companies to invest in new capacity, attributing this to the ongoing trade war and Beijing’s “anti-involution” campaign. This campaign targets excessive competition and the resulting deflationary pressures within the Chinese economy. These factors create a challenging environment for investment and growth.
Furthermore, Temple observed that home prices are continuing to decline, although official data from the National Bureau of Statistics “significantly understate” the extent of the downturn. He cited private sector indices indicating price falls roughly double the official figures. With the median household holding approximately 60 per cent of its wealth in housing, weak consumer confidence is unsurprising.
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