China has yet to shake off the short-term risk of deflation, according to data released by the National Bureau of Statistics on November 9.

China’s Consumer Price Index (CPI) rose by 0.3% year-on-year in October , marking a 0.1 percentage point decline from the previous month. On a month-on-month basis, CPI decreased by 0.3%, reflecting a similar 0.3 percentage point drop.

Breaking down the components, food prices—a key driver of CPI growth—slowed to a 2.9% year-on-year increase, representing a 0.4 percentage point deceleration. Non-food prices, however, recorded a deeper year-on-year decline of 0.3%, mainly due to falling international crude oil prices. Service-related prices edged up by 0.2 percentage points to a 0.4% annual growth rate, driven by a temporary boost in travel costs during the National Day holiday, but still registered a 0.4% year-on-year decline. Excluding food and energy, core CPI rose by just 0.2%, a modest increase of 0.1 percentage points from the previous period.

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On the Producer Price Index (PPI) side, China’s PPI contracted by 2.9% year-on-year in October, with a marginal decline of 0.1 percentage points from the previous month. The month-on-month figure showed a decline of 0.1%, albeit an improvement of 0.5 percentage points.

The breakdown indicates that producer prices for means of production remained down 3.3% year-on-year, though month-on-month growth of 0.1% suggests short-term support from recent stimulus measures targeting construction-related industries. Conversely, prices for consumer goods saw a broader decline, with a year-on-year decrease widening by 0.3 percentage points to 1.6%. Among durable goods, the decline in automobile factory prices expanded to 3.1%, while prices for computers, communications, and electronic products contracted by 2.9%.

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Overall, the impact of China’s September monetary easing policies appears limited, as consumer confidence remains weak and spending sluggish. This continued weakness has forced businesses to further lower prices, compressing margins and sustaining deflationary pressures in the economy.

The Chinese Government Passes a 10 Trillion Yuan Fiscal Policy

A day before the data release, China’s National People’s Congress Standing Committee approved a fiscal package totaling approximately 10 trillion yuan. This package aims to raise the annual ceiling for special local government bonds by 2 trillion yuan over the next three years to replace implicit local government debts. Additionally, 800 billion yuan per year over the next five years will be allocated to addressing these hidden debts through special bond issuance.

However, these measures primarily address debts accumulated through Local Government Financing Vehicles (LGFVs), which local governments have used to fund infrastructure projects and meet central GDP growth targets. By not appearing on local government balance sheets, these debts have enabled governments to bypass borrowing limits, leading to a massive buildup of hidden liabilities.

Banks often repackage LGFV bonds as high-yield wealth management products sold to domestic savers. Even though these savers know the low or non-existent economic returns of many of these projects, they continue to invest, confident that the central government will ultimately guarantee repayment. This has led to broad participation in what could be described as a “Ponzi scheme” with little regard for moral hazard.

The results are evident: the persistent decline in China’s real estate market appears to be leading the country toward a balance sheet recession, with private consumption and investment weighed down by high private sector debt repayment pressures. Although the government is aware of the issue, its approach has been largely confined to “new debt to replace old debt,” preventing meaningful economic recovery and efficient capital allocation.

China industrial profit continued to decline in September due to expanding deflationary pressure, according to data released by China’s National Bureau of Statistics on October 27.

Profits for large-scale industrial enterprises fell by 27.1% year-on-year in September, down 9.3 percentage points from the previous month’s decline of 17.8%. Cumulatively, profits for the first nine months of the year dropped by 3.5%, compared to a 3.0% decrease in the first eight months.

High-tech manufacturing remained the key driver of industrial profits, with cumulative growth of 6.3%, contributing 1.1 percentage points to overall growth. However, this was a decline from the 10.6% cumulative growth reported for January to August.

Yu Weining, a statistician from the National Bureau of Statistics, attributed the decline to weak domestic demand and falling industrial product prices. Recent figures show that China’s core CPI rose by just 0.1% year-on-year in September, down 0.2 percentage points from the previous month, while the PPI fell by 2.8%, marking 24 consecutive months of decline, reflecting persistent weakness in domestic demand.

With trade barriers expected to increase in the future, China’s manufacturing sector may struggle to absorb its excess capacity through exports and domestic demand, further compressing corporate profits and intensifying deflationary pressures. This could make it even more difficult for China to achieve its 5% annual economic growth target.

From November 4 to November 8, the Chinese government will convene the Standing Committee of the National People’s Congress in Beijing, where the market will be watching for any new stimulus measures.

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