China faces deflation risk as pork prices plunge

China, the world’s largest consumer and producer of pork, is facing a deflation risk as pork prices have plummeted by more than a quarter in the past year. The falling cost of pork, which accounts for nearly a third of China’s official consumer price index (CPI), is likely to push the country into negative inflation for the first time since 2021.

The main reason for the sharp drop in pork prices is the oversupply of pigs in the domestic market. China has been rebuilding its pig herd after a devastating outbreak of African swine fever in 2019-2020, which wiped out about half of the country’s pigs and sent pork prices soaring to record highs. The government has encouraged pig farmers to expand production and offered subsidies and incentives to boost the pork supply.

China faces deflation risk as pork prices plunge
China faces deflation risk as pork prices plunge

However, the recovery of the pig herd has outpaced the demand for pork, which has been weakened by the COVID-19 pandemic, changing consumer preferences, and rising imports of cheaper pork from other countries. According to the National Bureau of Statistics, China’s pork output rose by 35.9% year-on-year in the first three quarters of 2021, while pork consumption fell by 3.4% in the same period. As a result, the wholesale price of pork in China has fallen by more than 40% from a year ago, reaching the lowest level since 2018.

Deflationary pressure on the economy

The falling pork prices have dragged down the overall CPI, which measures the change in the prices of a basket of goods and services consumed by households. In October, China’s CPI fell by 0.3% year-on-year, the first decline since 2021, and below the market expectation of a 0.2% drop. The CPI was also lower than the 0.7% increase in September, indicating a rapid deflationary trend.

Deflation, or negative inflation, means that the general price level of goods and services is falling, which can have harmful economic consequences such as reduced consumer spending and investment, increased debt burdens, and lower profits and wages. Deflation can also erode the effectiveness of monetary policy, as lower interest rates have less impact on stimulating the economy when prices are falling.

Policy implications and challenges

The deflation risk poses a challenge for China’s policymakers, who are trying to balance the need to support the economic recovery from the pandemic and the desire to rein in the debt and financial risks that have accumulated over the years. The central bank, the People’s Bank of China, has maintained a prudent monetary policy stance, avoiding large-scale stimulus measures and keeping the benchmark interest rate unchanged since 2020. The government has also tightened fiscal spending and reduced the issuance of local government bonds, which are used to finance infrastructure projects.

However, some analysts have argued that China needs to adopt more proactive and flexible policies to prevent deflation from becoming entrenched and undermining the economic growth momentum. They have suggested that the central bank should cut the reserve requirement ratio, which is the amount of cash that banks must hold as reserves, to inject more liquidity into the system and lower the borrowing costs for businesses and households. They have also called for more fiscal stimulus, especially in the areas of social welfare, health care, and environmental protection, to boost domestic demand and consumption.

Outlook and prospects

The outlook for China’s inflation and deflation dynamics depends largely on the supply and demand of pork, as well as other factors such as the global commodity prices, the exchange rate of the yuan, and the COVID-19 situation. Some experts have predicted that pork prices will stabilize or rebound in the coming months, as the government intervenes to regulate the market, the cold weather increases the demand for pork, and the hog farmers adjust their production plans. Others have warned that pork prices may continue to fall, as the supply glut persists, the imports of pork remain high, and the consumers switch to other sources of protein.

In any case, China’s policymakers will have to monitor the inflation and deflation trends closely and respond accordingly, as they face the complex and uncertain challenges of maintaining the economic stability and resilience in the post-pandemic era.

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