The world economy has been adapted to the U.S. exporting inflation to China, and China actively encouraging the importation of inflation by pegging the Yuan to the Dollar.
If the Chinese economy experiences deflation it's a whole new ball-game and I can't even think through all the ramifications but here are a few of the classics:
Loans in China become harder to repay.
Investment slows.
Expecting lower prices consumers hold off on purchases.
None of it helpful to the avowed goal of developing China's domestic economy.
From The Telegraph:
Hard landing for China as factory prices fall and deflation looms
Factory gate prices in China fell at an accelerating rate of 2.9pc in July as the economy flirted with industrial recession, prompting calls for further stimulus to head off Japanese-style deflation.
“Severe deflation pressures are rippling across the country,” said Alistair Thornton and Xianfeng Ren from IHS Global Insight. “Deflation, not inflation, is the greatest short-term threat to the Chinese economy.”
“The hard landing has happened,” said Charles Dumas from Lombard Street Research. “We don’t believe official data. We think GDP slowed to a 1pc rate in the second quarter.”A blizzard of weak data has caught policy-makers off guard, though shares rallied in Shanghai on hopes for monetary loosening from China’s central bank after consumer price inflation (CPI) fell to 1.8pc.
New property starts fell 27pc in July. Industrial output growth fell to 9.2pc for a year ago but has been flat over recent months.
“This was the moment when stimulus was supposed to bite. It didn’t,” said Global Insight. Critics say Beijing let the property boom go too far and then hit the brakes too hard last year. Monetary tightening led to a contraction in real M1 money. The delayed effects kicked in this year just as Europe fell back into recession and the US slowed abruptly....MORE
