China is struggling to get to grips with the D-word
The world’s second-largest economy is drowning in deflation and debt as consumer spending dries up
Deflation is running rampant in China as cash-strapped shoppers struggle to cope with a real estate crisis, stagnating wages and rising unemployment. A “tariff war” with the United States and Europe has only added to the gloom.
Last month, the consumer price index dropped below zero for the first time in 13 months. Data released at the weekend by the National Bureau of Statistics showed that the CPI plunged to 0.7%, compared to a 0.5% rise in January.
Yet the warning signs have been flashing since the end of the Covid-19 pandemic. Last year, Fitch Ratings pointed out that “deflation in China risked becoming entrenched.”
The credit agency was not alone in its assessment. “China’s economy is likely to [be] trapped in a deflationary cycle for an additional two years,” Junhua Zhang at the European Institute for Asian Studies wrote in a commentary for Geopolitical Intelligence Services or GSI.
“To effectively address the issue, deflation cannot be solved merely by printing more money … it requires a holistic strategy,” he told the Liechtenstein-based think tank.
US$18 trillion of household wealth has been destroyed.
ICIS
Crash and burn:
- China’s property meltdown “has already destroyed US$18 trillion of household wealth,” according to the research group ICIS, which is part of LexisNexis.
- It also stressed that the country “has just had the greatest property bubble in history” popped.
- Up to 70% of household wealth is tied up in property. No wonder spending has dried up to a trickle.
Delve deeper: At the same time, Beijing has spent billions of dollars trying to prop up local governments whose finances have been shredded by the real estate slump.
Between the lines: “[They have] racked up as much as $11 trillion in off-the-books debt to build industrial districts, resorts, transit systems, and housing projects, including many that failed,” The Wall Street Journal reported.
Bottom line: All this is taking place with China locked in a trade showdown with the United States and Europe over a flood of cheap exports from steel to high-tech EVs.
Big picture: “[We] cannot just accept that strategically viable industries constituting the European industrial base are being priced out of the market,” Jens Eskelund, the president of the European Union Chamber of Commerce in China, told the media last year.
China Factor comment: Beijing is still pumping out a tsunami of exports. The move has even angered Global South partners. It seems easier than fixing an economy in chaos.