Deflation: China’s latest export has gathered strength
There is a strong (deflationary) gust blowing from the East. Last month, Chinese consumer prices fell at their fastest rate in 15 years. For the first time since the Global Financial Crisis (GFC) of 2008-09, China’s CPI fell 0.8% year-on-year (y-o-y).
The Chinese economy is in the midst of a long and significant property sector implosion and a dramatic decline in stock prices. It has been over six months since China lapsed into consumer-price deflation and producer prices have been in decline for 16 straight months. These indicators point to a significant risk of prolonged deflation in China.
In addition to its property sector slump and stock market downturn, there is a dramatic loss of investor confidence and a decline in consumer demand, even as exports weakened. This economic situation, characterized by excess supply, insufficient demand, debt-induced financial stress and politics-based economic decision-making, does not augur well for any easy solutions. Ironically, this deflationary wind is gathering strength at a time when neighbouring country Japan’s Nikkei Index has finally eclipsed its peak from 34 years ago.
A strong earnings report from US based chipmaker Nvidia allowed the Nikkei 225 to rise above that long forgotten 39,000 peak-level. The intervening three decades in the Japanese economy have been characterized by deflation and recessionary conditions. Japan’s core CPI reached 3.1% in 2023, its highest level in 41 years.
For the first time in decades, the Japanese central bank is contemplating normalizing interest rates. China will be wary of falling into the same abyss that Japan did after the collapse in its stock market and real estate bubbles in 1989. Unlike Japan’s, China’s economy is well diversified,
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