DEFALATION in China: Consumer Price Down 0.6%, Producer Price Down 2.1%

FREDERIC J. BROWN/AFP/Getty Images

The statistics this month have suggested signs of defaltion in China. In addition to the drop in CPI and PPI,  The Shanghai stock market dropped 2.37 percent, while the Shenzhen stock market fell 2.21 percent. Is China still the ideal market to invest? Let’s take a close look at the analysis done by New York Times journalist Keith Bradsher.

Prices are tumbling across the Chinese economy, according to government data released Monday, as a flood of goods pouring out of the nation’s factories and farms exceeds anemic demand from Chinese households and businesses.

The downward trend makes it much harder for businesses to sell enough goods to repay loans that they took out, usually on the expectation of rising prices. Falling prices also discourage investment, which has slowed sharply this spring, and give consumers an incentive to delay purchases until prices can fall further.

The news of falling prices, together with a pledge by Prime Minister Wen Jiabao on Saturday to maintain stringent bans on real estate speculation, produced a slide Monday in mainland Chinese stock markets. The Shanghai stock market dropped 2.37 percent, while the Shenzhen stock market fell 2.21 percent.

Consumer prices dropped 0.6 percent in June compared with May, the largest month-to-month drop in two years, the National Bureau of Statistics in Beijing announced Monday. Consumer prices were up 2.2 percent from a year ago, but only because prices kept rising fairly briskly through January of this year before beginning what has now become an accelerating descent.

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