Deflationary pressures persist in China, showing serious economic imbalances, and if deflation persists, these problems also exacerbate them.
Explanation
It appears that deflationary forces are gaining momentum in China.
The factory, overbuilt by planners in Beijing, has taken over more products than Chinese consumers and foreign buyers would like. Whether it’s a private or a state-owned company, you’ll be asking them to cut prices to unlock bloated inventory. Their interests suffer accordingly.
These pressures have been ongoing for a long time, and people have come to expect price cuts. Such psychology, once embedded, will have economic consequences that are negatively affected in its own right.
Meanwhile, producer-level goods (what the province calls “factory doors”) were below year-on-year at 2.5% in March. They have been declining since October 2022. China’s Gross Domestic Product (GDP) deflator, the economy’s widest price trove, fell for the sixth consecutive quarter.
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This issue has at least three roots. At the top of the list is a dramatic slowdown in export growth over the past few years. There’s a lot going on about the tariffs that President Donald Trump is introducing, and they’ll be important contributors to this economic lie. Still, they are just some of the larger images.
For example, the Biden administration criticised Trump’s tariffs in 2018 and 2019, taking part in the 2020 presidential campaign, but still took them in office, adding 100% tariffs on Chinese-made electric vehicles (EVs), parts and batteries.
The European Union also places tariffs on Chinese-made EVs. The export shortage is also not purely a result of actions by Western governments. Beijing’s Zero Covid policy has been blocking production and delivery for years since the pandemic ended, and foreign buyers have been actively sought to diversify their supply chains from China for some time.
Slow growth in exports has contributed to deflationary pressures, but it also suffers from a shortage of domestic demand. China’s long-term property crisis lies behind this sad reality. Not only has the financial failures of several real estate developers slowed progress in China’s key construction sector, but the crisis has also spread to Chinese consumers by pushing down real estate values and thus suppressing the net worth of millions of Chinese households. While Chinese at almost all income levels save to rebuild their household wealth, they remain very reluctant to spend, stacking stable production from Chinese factories on retail shelves.
If this wasn’t enough, Beijing in 2023 set out on a false guiding policy that exacerbated the situation. To compensate for the insufficient export growth, the authorities have decided to increase demand from home by pouring public funds into expanding the production capacity of selected industries. They chose what they saw as future industries, such as technology, EVs, biomedicine, and more, but all this was to increase production of products that neither domestic nor foreign buyers wanted. And with much of this additional capacity still online, there could be more deflationary pressures in the coming quarters as managers try to sell excess inventory.
The fundamental danger lies in this deflationary situation. If foreign and domestic buyers start to see deflation in wholesale prices as normal, they will delay buying in the hope that tomorrow’s prices will be more attractive than today. These delays contribute to the shortage of demand, put additional downward pressure on product prices, and create something like self-fulfilling prophecies.
The views expressed in this article are the views of the authors and do not necessarily reflect those of the epoch era.
