China’s economy has slid into deflation, with consumer prices declining for the first time in years. Concerns are growing that China is entering a period of slower economic growth, with consumer prices and wages dropping for an extended period.
Deflation refers to an overall decrease in prices and falls in valuation, in contrast to inflation, where prices rise, and the value of assets rise. While this may initially seem beneficial to China, deflation worries economies. Since deflation causes prices to fall, people stop buying products since they believe prices will continue dropping, reducing consumer spending. China could see companies take a severe hit since less customer spending means lower revenue, forcing companies to start laying off workers, reducing average income, which in turn reduces spending further. This negative feedback loop could lead to disastrous consequences for the Chinese economy.
A current theory proposes that because China produces a large percentage of goods sold worldwide, deflation in China may counteract rising prices in many other parts of the world, such as the UK, supporting global economies. However, many others believe that deflation in China will negatively affect the rest of the world. Countries like the United States, which import many goods from China, will primarily be hurt. As Green from the deVere group noted,
“As its exports become cheaper due to deflation, other economies might face increased competition, forcing them to lower their prices or risk losing market share.”
The root cause of the deflation in China comes from two main sectors. Ben Emons, head of fixed income at NewEdge Wealth, explains how the deflation in China appears to have come from the transportation and food sectors where prices are volatile, like pork prices, which have dropped by 26%. However, the deflation in China may be transitory, with Ben commenting,
“China may be in deflation, but that is less likely to persist as the Chinese government is set on hitting the GDP target of 5.5%. Moreover, pork-driven disinflation can be manipulated, which means that China CPI deflation is likely to reverse quickly.”
Written by Kevin Han
