Americans stressed by inflation, like those in China, may welcome news that prices are falling. But deflation is rarely good news economically, and certainly not for China. The emergence of deflation in the Middle Kingdom dramatically highlights a number of other news stories about the once huge economy’s economic problems. Consumer prices have fallen in the past two months and were about 0.5% lower in November, the latest period for which data is available, than 12 months ago, according to the Beijing National Bureau of Statistics. The equivalent of U.S. producer prices, which the China Bureau of Statistics calls the “factory gate,” has fallen 3.0% in the past 12 months. These aren’t big numbers, but they speak for themselves. These represent at least three major negative economic consequences. That means an oversupply of the wrong things, a lack of demand, and a tight fiscal environment, all of which the economy doesn’t want.
The Chinese government bears much of the blame for this situation, but not all of it stems from the policies of President Xi Jinping and his government colleagues. Through no fault of the Chinese government, the slowing US economy and the threat of recession in Europe are slowing the flow of Chinese exports to these two huge markets. Purchases of Chinese goods have also slowed, as both Brussels and Washington have shown marked hostility to Chinese trade. The US talks about “decoupling” from China’s economy, and Europe talks about “risk aversion,” but in reality they are the same. American and European companies are increasingly sourcing from outside China, and investment in China from Japan and other Western countries is decreasing.
If this emphasis on key aspects of China’s economy was not helped from within China, the Chinese government could rightly be blamed for China’s extreme vulnerability to declining exports. The International Monetary Fund (IMF) has long advised China to diversify its economic efforts away from exports and toward supporting domestic consumers in general and services in particular. While Xi and his government aligned themselves with the IMF, they encouraged its planners to continue pouring economic resources such as land, labor and capital into exports. Now, with the withdrawal of major markets in the United States and Europe, China’s economy is suffering more from lost export sales than it would have been had the adjustments negotiated by Beijing and the IMF been made.
With overseas sales lost, it’s no surprise that manufacturers and wholesalers are looking to move some of their products to China’s domestic market. These have met with limited success, as products suitable for export may not be suitable for the domestic market. Had planners made the change of direction recommended by the IMF and supported by rhetoric from their leaders, Chinese companies would have been well on their way to making the adjustments they now desperately need. This sudden shift of products to the domestic market, especially the wrong product mix, speaks to the emergence of deflation.
However, this is not everything. The weight of non-performing loans on China’s finances is also contributing to economic problems and deflation. Bankruptcies among China’s real estate developers and insolvent local governments have left Chinese financial institutions, both private and state-owned, with insufficient funds to finance the types of projects that would boost domestic demand and spur economic growth. ing. To make matters worse, the collapse of residential real estate development has led to a decline in real estate values and a corresponding decline in the net worth of China’s once rapidly growing middle class. Adding to this destruction of consumer confidence is the income uncertainty left by the legacy of strict and prolonged lockdowns imposed by the Chinese government’s zero-corona policy. As a result of both of these factors, Chinese households are cutting back on spending, and the drop in demand is slowing the pace of economic growth and, of course, contributing to deflation.
Chinese government rhetoric also contributes to these economic woes. For some time, until recently, President Xi Jinping has criticized China’s private companies, large and small, accusing them of working against the Chinese people by pursuing profits instead of supporting Communist Party policies. . He used government power to deny companies financing to expand, thereby cutting off an otherwise existing source of growth and employment. It is therefore not surprising that Chinese private companies are spending heavily on development and expansion. According to the Beijing National Bureau of Statistics, cumulative fixed asset investment by the private primary industry decreased by about 10.6% in the past 12 months. This shortage not only reduced demand and contributed to deflation, but also slowed the pace at which China adjusted its economy away from dependence on exports. There is a certain irony in that President Xi’s harsh words in support of communist policies have made China even more vulnerable to the United States and Europe.
The situation is not favorable for China’s growth. The Chinese government may claim within the next month or two that it has achieved its target of 5% real growth in 2023. If China makes such a claim, there will be a lot of legitimate speculation within and outside China about how the Ministry of Statistics is working. They made up numbers to make Beijing look good. It wouldn’t be the first time. If the Chinese government were to settle once again on its 5% real growth target for 2024, issues including deflation suggest that achieving it would require a significant statistical legal basis.
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