'It's really bad': China strategist warns of deflation and rock-bottom consumer confidence

Deflation may soon start biting into Chinese growth, as Beijing looks at another three to six months of a "very painful economy," according to one analyst who covers the country.

"This is something investors need to be cautious of. The economy here is bad, it's pretty ... it's really bad. I've been in China for 27 years, and this is probably the lowest confidence I've ever seen," Shaun Rein, founder of the China Market Research Group, told CNBC's "Squawk Box Europe" on Monday.

"So deflation is starting to wield its ugly head. Consumers are waiting for discounts. They're very nervous."

Linked to a decline in the prices of goods and services, deflation is generally associated with an economic slowdown — raising questions over the growth outlook for China, whose post-Covid-19 recovery has already fallen short of some expectations in 2023. In December, depressed prices for pork — which makes up around a fifth of China's CPI basket — heralded the possible advent of deflation.

"Deflation is a serious issue, I know the Chinese government doesn't want me saying it, but it's an issue that we need to be worried about," Rein stressed. "So I am kind of surprised that they kept the prime rates unchanged. You know, it would have been nice if they had lowered them to try to get some stimulus into the country."

Earlier on Monday, the People's Bank of China held its one-year and five-year loan prime rates at 3.45% and 4.2%, respectively, in line with forecasts. These are the pegs for most household and corporate loans in China and are one of many levers that the PBOC usually pulls in an effort to stimulate the economy.

The decision comes amid infectious expectations among investment banks that China's economy will expand at a more sluggish