Fears are growing that China's economy is tethering on the verge of deflation after another slate of underwhelming economic data provided more evidence of stagnating growth, renewing calls for more meaningful policy intervention.
On Monday, Beijing announced that GDP for the second quarter grew 6.3% from a year ago, missing market expectations for 7.3%. This also marked a 0.8% growth from the first quarter, slower than the 2.2% quarter-on-quarter pace recorded in the first three months of the year.
"We need to see broad and persistent price pressure before we can declare deflation," said Hong Hao, Grow Investment Group's chief economist. "This is happening in the upstream sectors and it normally takes two to four quarters to pass down."
"I think we are on the verge of deflation. Now it's the time to act to stem the deflationary pressure," he added.
Hong pointed to official data last week showing that China's producer prices fell 5.4% in June from a year earlier and slipped 0.8% from a month ago — falling below analysts' expectations. The annual decline in June was China's ninth consecutive drop and its steepest since December 2015.
Annual consumer price inflation was flat in June — driven by a 7.2% drop in pork prices — missing Reuters' expectations for a 0.2% rise and weaker than the 0.2% rise in May.
China pushback
The People's Bank of China pushed back on the deflation thesis last week.
"At this time there is no deflation, and there will be no risk of deflation in the second half of the year," Liu Guoqiang, deputy governor of the PBOC, told reporters last week. He pointed to factors such as China's economic recovery and growth in money supply.
Chinese banks extended 1.81 trillion yuan ($258.23 billion) in new yuan loans in June, up 22% from May.
Still, some economists are pointing to other indicators.
"Nominal GDP growth turns out to be lower than real GDP growth in Q2, the first time since comparable data are available in Q4 2016," said Zhang Zhiwei, Pinpoint Asset Management's president and chief economist. "This indicates that risk of deflation is serious."
Nominal gross domestic product measures economic activity without adjustment for inflation.
Economists at Citi and Macquarie also flagged the risk of sagging prices in the world's second-largest economy following Monday's release.
However, Macquarie economists Larry Hu and Yuxiao Zhang characterized the condition in China as disinflation — a temporary slowdown of rising prices — rather than deflation, which refers to a more serious problem where there's a persistent decrease in prices over time.
"Disinflation pressure is evident, as nominal GDP growth slowed to 4.8% year on year in 2Q from 5.0% in 1Q. It's the first time since the second quarter of 2020 that the GDP deflator has turned negative," Hu and Zhang wrote in their assessment of Monday's data release.
More downgrades
A raft of other June data have pointed to a weak prognosis. Even though top-line fixed asset investment and industrial output figures marginally exceeded market expectations, there was a worrying deepening decline in property investment.
Even with a low base from last year, given the Covid lockdown in Shanghai, retail sales slowed to 3.1% in June from a year before, compared to 12.7% in May.
Monday's disappointing data triggered another slew of downgrades by Wall Street banks, including Barclays, Citi, Morgan Stanley and JP Morgan.
Economists cut their forecast for China's annual growth, underscoring the depth of the exuberance on China's economic recovery when it emerged from strict zero Covid curbs late last year.
Citi, Morgan Stanley and JP Morgan now expect China's annual growth print this year to come in at 5%, while Barclays trimmed its forecast from 5.3% to 4.9%.
— CNBC's Evelyn Cheng contributed to this report.