IMF – China, Aug 2024

The paper analyzes the recent economic challenges faced by China, such as low inflation and disinflationary pressures resulting from ongoing property sector adjustments. A deflation vulnerability index (DVI) is developed to assess the downside risks to inflation in China, with output gaps and inflation expectations identified as key factors affecting the risk of core deflation. The probability of deflation in China is estimated to be around 7 percent in the baseline scenario, but could increase to 27 (54) percent following a one (two) standard deviation shock to DVI. Factors contributing to the low inflation include the property market correction, increased household savings, high levels of local government debt, and weak commodity prices. The paper aims to predict and quantify the probability of core inflation slipping into negative territory in the near future. Quantile regressions are used to analyze downside risks to inflation and suggest a significant increase in future deflation probability in case of large negative shocks. The study concludes with policy implications to address the current economic challenges in China.