Utility Price Hikes in Parts of China Hand Another Blow to Households

Utility price hikes in over 10 Chinese cities may temporarily boost inflation but could ultimately lead to deflation by reducing household spending power. Boosting household demand is crucial to avoid prolonged low growth and deflation, but policies to shift economic resources to consumers are difficult for debt-laden local governments. Cities like Shenzhen and Guangzhou have raised water or gas prices, and high-speed railway tickets are also set to increase.
These hikes have sparked social media criticism as people expect to have less to spend on basic needs. While price hikes might keep inflation positive in the short term, the effect will fade after a year, leaving negative impacts on demand. ANZ strategist Xing Zhaopeng notes that higher living costs will hit household sentiment, likely reducing domestic consumption.
New water prices in cities like Guangzhou and Shanghai have risen 10%-50%, and gas prices in cities like Chengdu and Shenzhen have increased 5%-20%. These increases come from a low base as cities have long subsidized utilities. From 2016 to 2021, annual increases in gas, water, and heating bills were 2.4%, 0.8%, and 0.2%, respectively. China has avoided the sharp utility price spikes seen in Europe post-Ukraine invasion due to subsidies.
However, cities are cutting spending as real estate downturns limit land lease revenue, a significant income source pre-pandemic. Land auction revenues in 2023 were about 20% below 2019 levels. Wang Dan, chief economist at Hang Seng Bank China, expects more price increases due to insufficient local government revenues to pay subsidies.
Despite rising costs, Xu Tianchen of the Economist Intelligence Unit notes they start from a small base, potentially leading lower-income groups to reduce wasteful consumption. ANZ estimates utility costs account for 7.7% of China’s consumer price inflation basket, with a minimal overall impact on this year’s inflation, maintaining a 0.7% end-year forecast. China has faced deflation for over a year, with a 0.3% year-on-year consumer price rise in April, partly due to higher utility prices. Recent hikes are not intended to boost inflation but may lead to economic stagnation and exacerbate deflation.

(Source: Reuters)