Deflation in China – Asrar Qureshi’s Blog Post #840

Deflation in China – Asrar Qureshi’s Blog Post #840

Dear Colleagues!  This is Asrar Qureshi’s Blog Post #840 for Pharma Veterans. Pharma Veterans aims to share knowledge and wisdom from Veterans for the benefit of Community at large. Pharma Veterans Blog is published by Asrar Qureshi on  WordPress, the top blog site. Please email to asrar@asrarqureshi.com for publishing your contributions here.

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In Pakistan, we are suffering from severe inflation. The prices are going up and the government is adding fuel to fire by raising prices of fuel, electricity, gas, crop buying, and by increasing wages of government employees by 35%. Every increase in this area adds to inflation. People are suffering hugely while the government does not seem to care. We are almost in a state of hyperinflation and the life is really biting everyone.

While inflation represents rising prices, its opposite is ‘deflation’ which represents decreasing prices. Can it happen anywhere in today’s world; yes, it is happening in China right now. 

Let us dig in it together to understand the phenomenon of deflation, what has led to this state in China, and what its impact on others could be.

Deflation is an economic phenomenon characterized by a sustained decrease in the general price level of goods and services. It’s the opposite of inflation.

The process of deflation occurs when demand for goods and services decreases significantly, leading to decreased production, reduced employment, and ultimately a downward spiral in prices. This can be triggered by various factors such as reduced consumer spending, declining business investment, or a contraction in the money supply.

Causes of deflation can include technological advancements that increase productivity, leading to oversupply; a decrease in consumer and business spending due to economic uncertainty; a credit crunch that restricts lending and spending; and government austerity measures.

The effects of deflation can be detrimental. Consumers may delay purchases in anticipation of lower prices, leading to further reduced demand. Businesses face declining revenues and profits, which can lead to layoffs and reduced investment. Debt becomes more burdensome as its real value increases. Central banks struggle to combat deflation as traditional monetary policy tools, like lowering interest rates, become less effective. 

Deflation in China

At present, deflation in China is in news all over. Since China is the second largest economy, we need to understand how it has evolved. Deflation in China is likely to have far reaching impact.

BBC reports that the official consumer price index – CPI – fell by 0.3% last month, from a year earlier. This shows that the domestic demand for goods was less than the supply and therefore the prices went down. (why can’t we in Pakistan boycott many things to reduce demand and cause price decrease?) 

Most developed countries saw a boom in consumer spending after pandemic restrictions ended. People who saved money were suddenly able and willing to spend, so much so that the businesses scrambled to keep up with the demand. 

This did not happen in China, arguably due to most stringent restriction imposed during pandemic. The consumer prices fell first in February 2021. The cusp of deflation continued for months, and the manufacturers kept reducing prices to keep the demand. 

Deflation seems good for consumers because they can buy more things with the same money. China is the largest exporter/supplier to the world, and lower export prices may reduce the prices in other countries. On the flip side, it increases the cost of local government debt and challenges in the housing market. Youth unemployment is at a record high, while, another 11.58 million university graduates are expected to enter the Chinese job market this year.

Official figures showed that China’s export fell by 14.5% in July compared with the last year, while imports dropped 12.4%. In addition, the ongoing property market crisis is worsening after the largest real estate company Evergrande filed for bankruptcy. 

Impact of China Deflation on the Rest of the World

The impact of deflation in China on the rest of the world is a rather complex issue. There are a number of factors to consider, including the size and interconnectedness of the Chinese economy, the nature of the deflationary forces at work, and the policy responses of other countries.

Some economists believe that deflation in China could have a significant negative impact on the global economy. They argue that China is a major driver of global growth and that deflation could lead to a slowdown in Chinese investment and exports, which would have a knock-on effect on other countries. Additionally, they argue that deflation could lead to a decrease in consumer spending, as people hold on to their money rather than spend it. This could further dampen global growth.

Other economists believe that the impact of deflation in China on the global economy will be more muted. They argue that China's economy is less interconnected with the global economy than it was in the past, and that other countries have taken steps to mitigate the impact of deflation. Additionally, they argue that deflation could lead to some positive outcomes, such as lower prices for consumers and businesses.

As yet, the impact of deflation in China on the rest of the world is uncertain. It will depend on a number of factors, including the severity of the deflation, the policy responses of other countries, and the overall state of the global economy.

Here are some specific ways in which deflation in China could impact the rest of the world:

• Decreased demand for imports: If Chinese consumers and businesses are spending less money, they will demand fewer imports from other countries. This could lead to a slowdown in economic growth in those countries.

• Decreased prices for exports: If Chinese prices are falling, it will make Chinese exports more competitive in the global market. This could lead to job losses in other countries that compete with China in exporting goods and services.

• Increased investment in China: If Chinese prices are falling, it will make it cheaper for foreign investors to invest in China. This could lead to a surge of investment in China, which could boost the Chinese economy and have a positive impact on other countries.

• Increased instability in financial markets: If deflation becomes widespread, it could lead to increased instability in financial markets. This could make it more difficult for businesses and consumers to get loans, which could dampen economic growth.

The overall impact of deflation in China on the rest of the world is difficult to predict. However, it is clear that it could have a significant impact on the global economy. China has been aggressively investing in too many countries, leasing their ports, reviving Old Silk Route, Belt and Road Initiative, construction projects, and what not. It may be early to say so, but such initiatives may be dampened leading to problems in poorer countries.

Concluded.

Disclaimer: Most pictures in these blogs are taken from Google Images and Pexels. Credit is given where known; some do not show copyright ownership. However, if a claim is lodged at any stage, we shall either mention the ownership clearly, or remove the picture with suitable regrets.

References: 

https://www.bloomberg.com/news/newsletters/2023-08-09/world-economy-latest-what-deflation-in-china-means-for-the-world

https://www.bbc.com/news/business-66435870