By Joe Cash
BEIJING (Reuters) – Utility price hikes in more than 10 Chinese cities could briefly lift national inflation from ultra-low levels but could ultimately turn into a deflationary force in the world’s biggest country. 2 as they further erode household purchasing power, analysts say.
Many economists have said that increasing household demand is crucial for China to avoid a prolonged period of weak growth and deflation like Japan’s in the long term, calling for policies that transfer economic resources to consumers.
But such measures are a difficult proposition for indebted local governments, saddled with $13 billion in debt as the relentless fight against COVID-19 and land auction revenues plummet due to a housing market crisis. exhausted their coffers.
The major technology and industrial hubs of Shenzhen and Guangzhou, and other cities in China, have in recent months increased or signaled plans to raise water or gas prices. Tickets on four of the busiest high-speed rail routes will also increase by up to 20% from June 15, state media reported.
The increases have generated criticism on social media from users who say they will have less to spend on other basic needs.
While the increases could help keep China’s consumer price growth in positive territory in the coming months, the increase is largely supply-driven – meaning the impact will disappear after a year due to statistical effects, leaving behind only the negative consequences on demand, analysts warn.
“The recovery in utility costs will only have a one-off impact on inflation,” said ANZ senior China strategist Xing Zhaopeng.
“However, household sentiment will be affected by the rising cost of living. Ultimately, it is likely to be negative for domestic consumption.”
Xing estimates that the new water prices announced by cities such as Guangzhou, Shanghai, Xianyang, Wuhu, Nanchong and Qujing represented increases of 10% to 50% year on year. For gas, cities such as Chengdu, Putian, Zhenjiang and Shenzhen have increased prices by between 5% and 20%, he said.
The size of these increases is significant, but they come from a low base, as most cities have subsidized public service prices for decades.
The average annual increase in 36 large and medium-sized cities in gas, water and heating bills from 2016 to 2021 was 2.4%, 0.8% and 0.2%, respectively, according to analysts at Huachuang Securities.
China also avoided the sharp increases in gas and energy bills seen in Europe and elsewhere following Russia’s invasion of Ukraine.
“Over the past few years in China, policymakers have generally artificially suppressed the prices of public services” through subsidies, said Xu Tianchen, senior economist at the Economist Intelligence Unit.
But cities are now cutting expenses as the severe housing crisis since 2021 has restricted their ability to raise money by leasing land to property developers, which in many places overshadowed other sources of income before the pandemic.
Across China, land auction revenues in 2023 were about 20% lower than pre-COVID levels in 2019, official data shows.
“Local governments… cannot generate enough revenue to pay subsidies,” said Wang Dan, chief economist at Hang Seng Bank China, adding that he expects more such increases in the future across the country.
A silver lining for Chinese households is that costs are rising from a small base, said Xu, who hopes people in the lower income group will reduce unnecessary water and energy consumption to keep their bills under control. control.
ANZ estimates that utility costs represent 7.7% of China’s consumer price inflation basket, including 4.2% for power and heat, 1.0% for gas, 0.2% for water and 2. 3% for transit fees. Due to the low weight, the overall impact on this year’s consumer price inflation would be an increase of no more than 0.2 percentage points, ANZ says, maintaining its year-end inflation forecast of 0.7%.
China has been flirting with deflation for more than a year. Consumer prices increased for the third consecutive month in April, 0.3% year on year, partly also due to higher utility prices.
The recent increases are “not a reflationary effort by authorities,” said ANZ’s Xing. “In fact, they often lead to economic stagnation and can exaggerate deflation.”
(Additional reporting by Liangping Gao and Beijing newsroom; Editing by Marius Zaharia and Shri Navaratnam)
