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Why shall we take a close look at what's going on in China, and why it matters?

The Chinese economy is in deeper trouble than we may think. The Chinese economy is in a deflationary state as prices have been falling consistently, and it is becoming a major concern not just for China, but for the rest of the world.

In 2022, the Consumer Price Index (CPI) fell by 0.4% year-on-year, for the first time since 2015. And this year, it fell to 0.3%. According to Asian Markets, the truth is that China has never truly recovered from COVID, whereas nearly every other country in the world—once the opening finally happened, and the end of the pandemic was declared—we saw an expansion in consumption as people tried to get back to some version of their life which generated a lot of inflation.

China's GDP Growth, 2012-2022 (forecasted to 2028)

Source: Statista

Growth is actually lower now than it was over the course of the last two years when they were supposedly under complete lockdown. Consumption is down, imports and exports both dropped in July compared to a year earlier by digits of percentages. As forecasted by Statista, the Chinese economy is expected to keep declining to 3.44% by 2028. Of course, these numbers can change. They are only forecasts. Forecasts change according to new circumstances and black-swan events.

There are a number of factors that led to China’s deflationary state. First, there is a slowdown in economic growth. China's economy grew by 8.45% in 2021, the slowest pace in a decade. This has led to lower demand for goods and services, which has put downward pressure on prices. Second, the trade war between China and the United States has also contributed to deflation, as it has made it more expensive for Chinese businesses to import raw materials and components. And third, there has been a decline in asset prices. Indeed, the value of stocks, bonds, and real estate in China has fallen in recent years, which has also helped to drive deflation.

Why the deflationary state in China is a problem for the rest of the world? First, the positive aspect of deflation is that people can afford to spend on many goods and services at lower prices. But it is a serious problem because if cut-price Chinese goods flood the global markets, it could have a negative impact on manufacturers in other countries, which could then hit investment by businesses and squeeze employment. This could then result in a fall in demand from other the country—the world’s largest marketplace—for energy, raw materials, and food, which would hit global exports.

China’s exports fell by 14.5% in July compared with a year earlier, while imports dropped 12.4%. The grim trade data reinforces concerns that the country’s economic growth could slow further this year.

Deflation, overall, is problematic because when prices are falling too much, consumers and businesses tend to delay spending, which can lead to a slowdown in economic activity. And as businesses see their profits decline, they may lay off workers.

Deflation also affects asset prices because when prices are falling, the value of assets such as stocks, bonds, and real estate also declines. This can make it difficult for businesses to raise capital and for consumers to borrow money.

Another key factor that ought to be mentioned is the decline in the birth rate. Indeed, from 2017 to 2021, the birthrate dropped by about 40%, and even in the months before COVID, car sales were going negative and they never really recovered.

The Chinese economy is in deep trouble and the economic forecasts and predictions do not look bright regarding its GDP growth do not look bright. The Chinese government has tried to take measures to attenuate this deflationary state by increasing infrastructure spending, reducing interest rates, and injecting liquidity into the economy. Doing also too much propping up the economy can lead to an inflationary state, which will lead to a decline in the living standards of the Chinese people.


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