From Bloomberg, December 12:
China’s spiral into deflation is proving hard to fix. Prices in the world’s second-biggest economy have fallen for six consecutive quarters, and if they fall for one more quarter, the run would equal a record deflationary streak set in the Asian Financial Crisis in the late 1990s.
Policymakers have pledged to do more to shore up growth and ease price declines, using some of their most direct language in years, as Beijing braces for a trade war with Donald Trump’s return to the White House. The US president-elect has vowed to impose a 60% tariff on Chinese exports that would decimate bilateral trade.
What is deflation?
The term describes a situation in which prices for goods and services fall across the economy. It’s not to be confused with disinflation, which signifies prices are still rising, though more slowly. That’s what’s happening in the US, where annual price growth has slowed significantly since mid-2022.Why is China in deflation?
Prices rocketed in the US and other big economies when they reopened after the Covid-19 pandemic, as pent-up demand coincided with shortages in the supply of many goods. Predictions the same would happen in China proved to be wrong. Consumer spending power is weak and a real estate slump has dented confidence, holding people back from buying big-ticket items.A tightening of regulations on high-paying industries from tech to finance has led to lay-offs and salary cuts, further dampening the appetite for spending. A policy push to develop manufacturing and high-tech goods led to increased production, but demand for the goods has been weak, forcing businesses to mark down prices.
What’s so bad about falling prices?
Cheaper prices look good for consumers at first, but that doesn’t necessarily mean people will start spending again. In fact, they might hold off from buying expensive items in the hope that prices will fall further. That would depress economic activity even more, putting pressure on incomes, which could result in another dip in spending and further price cuts in a downward spiral.Deflation also raises the level of “real,” or inflation-adjusted, interest rates in the economy. Higher debt servicing costs make it harder for businesses to invest, which in turn crimps demand, inducing more deflation. Some economists believe such “debt deflation” can trigger recessions or depressions as people default on their loans and banks are undermined.
Why is China’s deflation hard to fix?
Beijing responded to past bouts of deflation with forceful monetary easing and big fiscal stimulus measures. Since the pandemic, the government has approached stimulus with more caution, wary of piling too much debt onto the economy.Policymakers are reluctant to go back to the old playbook of building infrastructure and engineering a property boom, since President Xi Jinping is determined to shift the economy toward new growth drivers such as advanced technologies. As a result, stimulus measures have been relatively restrained, and investors remain somewhat pessimistic over the economic outlook. In a sign of the gloom, 10-year government bond yields have fallen to a record low.
Top officials led by Xi vowed to raise the fiscal deficit target, while signaling an increase in public borrowing and spending following a two-day meeting in December of the Central Economic Work Conference....
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The messages that came out of the conference were underwhelming. Hong Kong's Hang Seng Index is down 1.88% while the Shanghai-Shenzhen CSI 300 index is down 2.37%.
