The Chinese economy seems to go against the current of other countries. While the United States and Europe have been struggling for months to bring down inflation, the Asian giant is facing a general decline in prices that is jeopardizing its 5% growth forecast for this year. In June, its year-on-year CPI stood at 0%, which represents a slowdown of two tenths compared to the previous month and its lowest level in 28 months, when the fall in pork meat costs dragged down the rest of the products.

Core inflation, which excludes the impact of volatility in energy and fresh food prices, slowed to 0.4% from 0.6% the previous month. And producer prices fell 5.4% year-on-year, the biggest slowdown since December 2015 and the ninth consecutive drop.

These are figures that contrast with the rest of the large economies, which remain far from the 2% target. In the United States, prices recorded year-on-year growth of 4% in May, nine tenths less than in the previous month which, however, will not prevent the Federal Reserve from raising rates to 5.5% in July. The eurozone faces a similar scenario. It has also registered a significant drop in June (reaching 5.5% compared to 6.1% in May) which leaves it halfway in the normalization of prices, but which does not save it from the European Central Bank raising the price of money to 4.25% in July. Until now, Spain has been the only country in the Old Continent that has managed to lower inflation below 2%.

Despite the fact that the general trend of economic policy is restrictive, China has insisted on lowering interest rates to combat the slowdown in its economy. However, it continues to lose steam. The most disturbing matter has to do with the causes behind this sharp slowdown and which are, specifically, the real estate blowout in which the country is immersed, the fear that banks could catch this situation, a slowdown in industrial production and the reduction in business margins.

The data clouded the economic future of the world’s second-largest economy, heightening downside risks to global growth this year. CaixaBank Research warns in this regard that “the hopes placed on the Chinese reopening being the catalyst for the global economy in general, and industrial activity in particular, are being disappointed.”

At the national level, analysts at Moody’s Analytics doubt whether China will be able to reach its growth target and condition it on external demand. Also, keep in mind that while April-May retail sales were strong, the year-over-year rebound was not due to strong sales, but rather because of a very poor build off of a previous year. In parallel, CaixaBank Research analysts ensure that its growth pattern is being very different from that shown in other phases of recovery, since it is based on private consumption, in particular of services, which has less drag on other internal sectors and on the national economy. Faced with such conditions, experts are not surprised that Beijing’s good start to the year is giving way to a phase of apathy.

Barclays points out that the current scenario of deflation and economic slowdown places the People’s Bank of China (BPC) in a cycle of interest rate reductions. Economists at Japanese investment bank Nomura take the same reading and believe there will be another two rounds of cuts of at least 10 basis points. The question is whether the cuts will be able to revive credit, which is suffering from structural problems derived from the loss of confidence in the real estate market. Josh Gilbert, a market analyst, says that consumers and businesses continue to contain spending in the expectation that costs will continue to fall, raising fears of a price spiral. And he adds that “the CPI is just one of the many data that the Chinese economy has produced in recent months and that shows that the economic recovery is faltering.”

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