No quick fix as China’s economy sinks into deflation
By Eryk Bagshaw
Singapore: China’s economy has fallen into deflation as it struggles to escape a deepening spiral of poor economic growth due to the COVID-19 pandemic.
Prices fell across the world’s second-largest economy in July, bucking the trend of high global inflation as Chinese consumers shut their wallets and hoarded savings over fears of another economic crisis.
The Chinese government is attempting to restart the economy without outlaying billions in stimulus spending.Credit: Sanghee Liu
The Australian government has been watching the Chinese data closely. Despite $20 billion in trade strikes over the past four years, the superpower remains Australia’s largest export market and a key engine of Australia’s domestic economic growth.
More than 20 per cent of the improvement in the federal budget over the past year has been driven by taxes from resources such as iron ore, most of which go to China.
“The global economy is a pretty precarious place right now,” Treasurer Jim Chalmers said in July. “The Chinese economy is a bit softer than people would like – that has obvious implications for us, and so we monitor it closely.”
Hopes of a rebound were dashed on Wednesday when China’s consumer price index, which measures the cost of goods in supermarkets and daily purchases, recorded a fall of 0.3 per cent in July compared with the same time last year.
The price of goods leaving factories fell by 4.4 per cent, indicating further price slides could be to come.
Deflation can be more damaging for the economy than inflation as buyers put off spending until prices drop further, pulling the economy into a loop of low growth, recession and unemployment that can take years to overcome.
The figures are posing a major policy challenge for the Chinese government, which is attempting to restart the economy without outlaying billions in stimulus spending that has pushed Beijing and local governments further into debt over the past two decades.
Local governments in China now hold more than $12 trillion in debt, according to data analysis firm Rhodium Group, after years of cash splashes on infrastructure and wasteful real estate development programs.
But Chinese consumers have been more reluctant than those in the West to pick up their own spending after a tumultuous few years that made the world and Beijing lurch from one economic crisis to another due to the COVID-19 pandemic.
China’s Finance Ministry has acknowledged that the economy is facing ongoing “difficulties and challenges”, while reassuring markets that any stimulus package would be implemented “with precision and force”.
Chinese blue-chip markets fell on the release of the data, along with shares in Hong Kong property developers, which dropped another 0.4 per cent after falling by almost 5 per cent on Tuesday.
Commonwealth Bank analyst Carol Kong said the last time China experienced deflation was in the middle of the COVID-19 pandemic in 2021.
“The potential deflation is more worrisome now than the previous episode, given the backdrop of weak consumer demand,” she said.
“In our view, further easing measures are needed to counter deflationary pressures.”
Capital Economics head of China economics Julian Evans-Pritchard said the risk of a negative deflationary loop was now emerging.
“There are no quick policy fixes for China’s challenges,” he said.
“Fundamentally, the weak demand [can] be attributed to the lack of demand-side stimulus during the lockdown periods, the aftershock of the policy and regulatory surprises during the past couple of years, and the continued drags from the property market.”
Beijing has become sensitive to public criticism of its response to the growing economic challenge. The Financial Times reported on Sunday that the Chinese government has been warning economics experts not to talk down the economy.
“[They] want us to interpret bad news from a positive light,” one central bank adviser told The Financial Times.
But China’s own official data is painting an increasingly worrying picture. Chinese exports fell by 14.5 per cent in July from the same time last year, with international demand for Chinese goods falling faster than many analysts were expecting.
Customers at a produce market in Beijing.Credit: Reuters
The combination of less international money coming into China with low domestic consumer demand is exacerbating the risk of a deflationary loop.
Evans-Pritchard said the soft economic figures were a concern but the Chinese government’s restrictions on public spending and its encouragement of the private sector to get it out of trouble were positive signs of longer-term policy improvement.
“The unwillingness to ‘go big’ on stimulus is a positive development,” he said.
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