Significant challenges have arisen for the Chinese economy. The real estate sector is weak, with less and less stimulus, youth unemployment has risen, the currency has depreciated sharply in the last year and the deflationary scenario has added further risks to Chinese economic activity.
However, recent developments have improved the outlook for the Chinese economy. Based on this new data, we will update our view of China and its possible impacts on commodities.
China's CPI rose 0.7% YoY, breaking a four-month streak of declines. The reading was above market expectations of a 0.3% increase. On a monthly basis, the CPI rose 1.0%.
Slower deflation in food prices was the main factor behind the rise in the CPI. The fall in food prices slowed to -0.9% year-on-year, from -5.9% in January. Demand related to the Lunar New Year holiday probably gave these prices a boost.
Higher travel prices - probably driven by holiday demand - were another important reason. These prices rose 23.1% YoY, accelerating from the 1.8% increase recorded in January. Adverse weather, with freezing rain in central China in mid-February, also fueled upward pressure on food and travel prices.
Despite the positive result for economic activity, the factors that led to the end of deflation are temporary. The producer price index, which tends to be much less affected by the Lunar New Year holidays, fell by 2.7% YoY, more than the 2.5% drop in January. This was larger than the consensus estimate of a 2.5% drop.
Source: National Bureau of Statistics of China
Chinese Premier Li Qiang's first budget indicated a strong commitment to growth. The 5% target for 2024 sets a high bar, given a more challenging base than last year - and achieving it will require more stimulus.
However, the stronger than expected budget deficit is consistent with the ambitious target. The target is considerably higher than the consensus projection that the Chinese economy will expand by 4.5%. It is also higher than the potential growth for the year, estimated at 4.9%.
The government has set the broad fiscal budget deficit at 8.96 trillion yuan, or 6.6% of GDP. This includes a deficit of 4.06 trillion yuan (3.0% of GDP) in the general budget, 1 trillion yuan in special bond issues by the central government and 3.9 trillion yuan in special bonds by the local government. This figure is higher than last year's original budget deficit, which was set at 5.9%.
In 2023, local governments delayed spending, impacting growth. The risk is that this will happen again this year. Restrictions on the expansion of local government debt could prevent projects from being carried out, as the corresponding local resources are usually needed for large projects.
The strength of private sector confidence will also determine the effectiveness of fiscal policy. Unless there is a change in sentiment, private investment will be slow - and the government alone cannot generate a lasting recovery.
