Aug 9, 2023, 10:33am EDT
businessEast Asia

China’s economy has tipped into deflation

REUTERS/Tingshu Wang

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The News

China’s economy has tipped into deflation after consumer prices declined for the first time in two years — a sign that domestic demand remains weak and that Chinese policymakers may be forced to deploy monetary and fiscal measures.

According to the National Bureau of Statistics, the consumer price index fell by 0.3% in July compared to a year ago.

The world’s second-largest economy is also experiencing ballooning debt, a housing crisis, and record youth unemployment.

We’ve curated reporting and insights on what this means for the future of the world’s second-largest economy and the rest of the world.

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  • Chinese policymakers say that Beijing’s tip into deflation is a temporary blip, but “the reality looks increasingly grim,” said Eswar Prasad, a professor of trade policy and economics at Cornell University. Even though China’s central bank has reduced interest rates many times this year, the government has not yet introduced large scale stimulus measures — partly because of soaring debt. Consumer confidence in the real estate sector has also fallen — an area that has historically been China’s main driver of growth. And unlike other countries that have incentivized spending through cash handouts, Beijing has so far not offered such support. China’s approach of downplaying deflation could eventually “backfire,” Prasad said, and “make it even harder to pull the economy out of its downward spiral.” — The Wall Street Journal
  • One China expert opined that the “near-term pessimism” about China’s economy was getting out of hand, arguing that the country was already in deflation for most of 2023, but that it finally “emerged” in July. “That’s because after 5 months of month-on-month declines in the CPI index, in July the index finally rose again, by 0.2%,” said Michael Pettis, a Senior Fellow at the Carnegie Endowment for International Peace.
  • Analysts who spoke with Insider see a silver lining in China’s deflation problem — saying that falling prices in Beijing could “feed through Chinese exports” and give central bankers in the U.S., the U.K., and other Western countries facing soaring prices, a helping hand. Cheaper goods from China could “pull global inflation down to more manageable levels” and therefore cut rising interest rates in other parts of the world.