China is not on the brink of a major period of deflation, according to economists, despite the latest underwhelming growth data. China’s consumer prices fell at the fastest pace in three years in November, dropping 0.5% both from a year earlier and compared with October, data from the Chinese National Bureau of Statistics showed.

The manufacturing sector was even quieter than the month before, as tentative shoppers held back from ordering anything they didn’t need. With the service sector also clocking up lower-than-expected numbers, the government may need to bring in more drastic measures to avoid being left red-faced on the world stage.

China’s economy has struggled to mount a strong post-pandemic recovery, held back by a deepening crisis in the property market, local government debt risks, slow global growth and geopolitical tensions. Some see a bleak future of stagnation like that which dogged Japan in the 1990s after its property and stock market bubbles burst.

‘Let us be very clear, China is not on the brink of deflation, and the situation between Japan in 1990 and China today is very different’, insists Robert Carnell, head of Asia-Pacific research at investment bank ING, who alongside others cautions against reading too much into a single month’s dataset.

Carnell believes China’s property market, while ‘currently being kept on life support’, is unlikely to embark on new investment which could risk pushing it over the edge.

‘What follows is likely to be a period of much slower property price growth or even some slight declines. From an aggregate point of view, that is neither particularly worrying nor all that undesirable.’

Investors in China have also suffered over the past year with data showing funds typically having fallen 35%. Extended lockdowns and a drawn-out recovery from the pandemic, as well as geopolitical tensions with Taiwan and the US, have hurt sentiment.

Data from Investing.com shows the Shanghai Composite and Hong Kong’s Hang Seng are among the worst major market performers in 2023, down roughly 3% and 17% respectively.

In contrast, Japan’s Nikkei 225 has rallied nearly 26% evoking images of two economies passing each other on the stairs in terms of inflation and stock market performance.

‘Corporate governance reforms are paying off, with a growing number of Japanese firms becoming more strategic and focused’, said Sam Perry, senior investment manager at Pictet Asset Management.

According to the Tankan survey, Japanese companies are intending to invest faster than they have at any point in the last 40 years and this momentum will only strengthen as domestic economic activity picks up, believes Perry.

Economists at Pictet estimate Japan’s gross domestic product will grow by around 1.5% in 2024, which is faster than the US and the euro zone. China will probably grow by about 5% this year, according to ING.

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