ASX 200 flat amid latest inflation news from China

Domestic demand is falling in China, raising fears of deflation.

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The ASX 200 remains only slightly in the green amid just-released inflation data from China suggesting the world's second-biggest economy may be heading for a period of deflation.

The S&P/ASX 200 Index (ASX: XJO) is up 0.085% at the time of writing to 7,317.3 points.

Let's take a look at the news out of China.

ASX 200 steady amid fall in Chinese consumer prices

Consumer prices in China fell for the first time since February 2021 in July, down 0.3% year-over-year (yoy).

The South China Morning Post reports that this is actually a bit better than expectations. The CPI was expected to fall given this time last year inflation was at a two-year high.

But it still doesn't bode well for the country's economic health.

The hope is the CPI will rebound in August and finish the year around the 1% mark. But this is still well below the government's 3% target for 2023.

The closely-watched producer price index (PPI) fell for the 10th consecutive month in July, down 4.4% yoy.

The PPI reflects the prices that factories charge wholesalers for products. It was down 5.4% in June.

Private Chinese companies appear hesitant to invest and expand in the current climate, and it appears consumers are reining in their spending.

Food prices were down 1% yoy compared to a 2.3% increase in June. Non-food prices rose by 0.5% yoy in July compared to a decline of 0.6% in June.

Deflation likely to be temporary

If China does enter a period of deflation, experts say it will be temporary, particularly if the government introduces stimulatory measures as widely expected to reboot the economy.

Deflation refers to three consecutive monthly declines in prices.

China's economic recovery from COVID has not been as big as the world expected.

Reuters reports that the share prices of listed Chinese property developers in Hong Kong (.HSMPI) fell 0.5% on the inflation news. This followed a 4.8% fall yesterday.

Property construction is a huge component of China's economy and fuels a lot of the demand for Australian iron ore to make steel.

ASX 200 iron ore shares are slightly in the red at the time of writing.

Rio Tinto Ltd (ASX: RIO) shares are down 0.7% to $112.65 per share.

The BHP Group Ltd (ASX: BHP) share price is down 0.15% to $45.25.

Rife speculation in China's debt-laden property development sector in recent years has led to the government calling for its citizens to adjust their view of property not as a financial asset but simply as a home.

Commenting on the inflation news, Morgan Stanley's chief Asia economist Chetan Ahya said (courtesy Reuters):

China is once again facing renewed headwinds posed by the 3D challenge of debt, demographics and deflation.

We think China is better-placed than Japan in the 1990s. It should be less challenging to prevent China from falling into a persistent debt-deflation loop.

Zhang Zhiwei, president and chief economist at Pinpoint Asset Management, said:

Both CPI and PPI are in deflation territory. The economic momentum continues to weaken due to lacklustre domestic demand.

It is not clear at this stage if the policies announced recently can turn around the economic momentum soon.

The CPI deflation may put more pressure on the government to consider additional fiscal stimulus to mitigate the challenge.

According to the South China Morning Post, the National Bureau of Statistics says the drop in CPI will only be temporary.

It expects CPI to pick up gradually as the economy recovers.

The health of China's economy can have a direct impact on ASX 200 shares given China is Australia's biggest trading partner.

Motley Fool contributor Bronwyn Allen has positions in BHP Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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