There are many reasons for this. First, only about 12 months ago, pandemic restrictions were dropped in China. Therefore, The country still benefits from the standardization of its production chains, which helps reduce costs.
In addition, it continues to benefit from a source of hydrocarbons at broken prices thanks to imports from Russia. The country was, therefore, not affected by the surge in energy prices.
But the main reason for this zero inflation (even in negative ground in July) is weak demand. Housing setbacks and lack of support during the pandemic have impacted households who have seen their wealth values fall and have been forced to dip into their savings to stay afloat. This undermines consumer confidence.
Many are quick to rebuild their savings rather than consume. As long as the real estate market problems are not finally resolved, private sector investment will have a hard time returning to its former level.
Faced with this weak demand, specific sectors of activity are embarking on a price war, which helps to destroy inflation. This is particularly true in the electric vehicle sector, where a price war continues and may extend beyond Chinese borders.
This zero inflation is not just a loser. This is particularly the case for the bond market since nominal returns are equivalent to actual returns (after inflation). Offering a rate of around 2.7% - an identical real return - Chinese 10-year debt is an attractive diversification for more risk-averse investors.
The danger of deflation also makes it more likely that the Beijing authorities will provide further economic support. Several avenues are raised at this stage.
They could let public spending slip by, worsening the budget deficit for the current year. Policy rates could still be revised downwards.