The Chinese government is facing the problem of deflation.
Downward pressure in the world's second-largest economy persisted in September, when consumer and production prices declined by 0.3% and 2.3%, respectively, compared with last year.
Calls for Beijing to intervene with political measures to stop price declines have intensified, and the government has responded by introducing steps to limit competition.
Among them is the promise of Chinese leaders to stop aggressive price cuts by some domestic companies, which, according to regulators, is putting pressure on an already slowing multi—trillion economy.
Beijing's campaign to reduce production and consolidate industries in order to stop the sharp decline in prices, partly due to the need for Chinese companies to sell off stocks and attract customers, has been called "anti-revolution." This term refers to countering "involution" — intense, continuous competition that can cause overexertion without any meaningful benefits or progress.
However, as BCA Research analysts note in a note to clients, they do not expect these policies to "put an end to deflation [...] over the next year or so."
"The Chinese authorities will be reluctant to reduce production capacity, as this strategy will lead to layoffs," they argue. "Consequently, production will continue to exceed demand, and price deflation will persist."
As long as there is excess production, companies will continue to lower prices to protect their market shares, which will eventually hit internal corporate profits, analysts including Artur Budagyan and Rajib Pramanik added.
Investors, as they subsequently recommended, should not try to "chase the growth of Chinese stocks," even if stocks in the country continue to rise due to the ongoing rally in the American stock market.
"The lack of widespread economic recovery in China and the low profitability of many companies (with the exception of a few technology names) They do not justify the rise in Chinese stock prices," the analysts said.
For global equity and emerging market portfolios, they maintained a "neutral weight" in Chinese stocks listed on the Hong Kong and US indices, as well as in the A-share market traded on the Shanghai and Shenzhen mainland exchanges.