Utility price hikes in more than 10 Chinese cities may briefly lift nationwide inflation from ultra-low levels, but could ultimately turn into a deflationary force in the world's no. 2 economy as they further erode the households' spending power, analysts say.
Many economists have said boosting household demand is crucial for China to avoid a Japan-like prolonged period of meagre growth and deflation in the long run, calling for policies that transfer economic resources to consumers.
But such measures are a difficult proposition for indebted local governments, saddled with $13 trillion in debt as a relentless fight against COVID-19 and plunging land auction revenues due to a property market crisis have depleted their coffers.
The large tech and manufacturing hubs of Shenzhen and Guangzhou, and other cities in China, have in recent months increased or flagged plans to raise water or gas prices. Tickets on four of the busiest high-speed railway routes will also rise by up to 20% from June 15, state media reported.
The increases have prompted criticism on social media from users who say they will have less to spend on other basic needs.
While the hikes might help keep China's consumer price growth in positive territory in coming months, the uptick 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 utility cost rally will only have a one-off impact on inflation," ANZ senior China strategist Xing Zhaopeng, said.
"Yet, household sentiment will be hit by higher living costs. Ultimately, it is likely to be negative to domestic consumption."
Xing estimates the new water prices announced by cities including Guangzhou, Shanghai, Xianyang, Wuhu, Nanchong and Qujing, amounted to hikes of 10%-50% year-on-year. For gas, cities such as Chengdu, Putian, Zhenjiang and Shenzhen have raised prices by 5-20%, he said.
The size of these increases is significant, but they are coming off a low base as most cities have been subsidising utility prices for decades.
The average annual increase in 36 large and medium-sized cities for 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 has also avoided the sharp spikes in gas and power bills seen in Europe and elsewhere following Russia's invasion of Ukraine.
"Over the past few years in China, policymakers have by and large suppressed utility prices artificially," through subsidies, said Xu Tianchen, senior economist at the Economist Intelligence Unit.
But cities are now cutting spending as a severe real estate downturn since 2021 has curbed their ability to raise cash by leasing land to property developers, which in many places dwarfed other sources of income before the pandemic.
Across China, land auction revenues in 2023 were about 20% below pre-COVID levels in 2019, official data show.
"Local governments ... can't generate sufficient revenues to pay subsidies," said Wang Dan, chief economist at Hang Seng Bank China, adding she expected more such increases in the future across the country.
One silver lining for Chinese households is that the costs are rising from a small base, said Xu, who expects those in the lower-income group to reduce wasteful consumption of water and energy to keep their bills in check.
ANZ estimates utility costs account for 7.7% of China's consumer price inflation basket, including 4.2% for power and heating, 1.0% for gas, 0.2% for water and 2.3% for traffic fares. 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 end-year inflation forecast of 0.7%.
China has been flirting with deflation for more than a year. Consumer prices rose for a third straight month in April, by 0.3% year-on-year, in part also due to higher utility prices.
The recent hikes "are not a reflationary effort by the authorities," ANZ's Xing said. "In fact, they usually lead to economic stagnation and could exaggerate the deflation."
