China Slips Into Deflation. Should The World Care?

China, Deflation, Economy, Cost of Living

The Chinese economy is struggling. That could be the spark that ultimately ends the West’s problems with inflation.Consumer spending, manufacturing output, and investments in long-term assets like machinery or real estate all declined in China last month. Investors are worried about the future since youth unemployment has reached record highs and there is still a real estate and loan crisis.

The Chinese government shocked investors on Monday by opting not to lower a crucial interest rate that affects mortgages. The decision, according to economists, will make it difficult to restore confidence in the nation’s real estate market, and they have begun revising downward their projections for Chinese growth this year.

Why is China Slipping Into Deflation?

Retailers in China have been impacted by a downturn in sales, according to a Guardian article. After the restrictions caused by COVID-19 were relaxed, businesses that had stocked up on products in expectation of a rise in demand are now being forced to lower their prices.

The cost of living was also lowered as a result of falling food costs. As a result of falling commodity costs, the nation’s factories are already lowering their pricing for their goods.
Car prices have also decreased because Tesla’s pricing cuts in China’s electric vehicle sector started a price war.

The second-largest economy in the world, which accounts for nearly one-fifth of global GDP, is slowing down, which has significant and immediate effects for the rest of the globe.

The Policy Makers of China

The US was prepared for a quick post-Covid economic recovery because of unprecedented assistance from the Federal Reserve and the federal government. Following this, it also saw the highest inflation rates in 40 years, which were additionally helped last year by
skyrocketing energy costs.

According to Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, China’s policymakers concentrated on improving debt management. Along with, dismantling private tech monopolies, and banning real estate speculation. This prepared the nation for a disappointing post-Covid recovery and deflation.

“It seems China’s disinflation problem is coinciding with the European and US struggle to significantly bring down inflation,” said Edward Moya, senior market analyst at data and analytics firm OANDA. “Overall this is going to lead to a much weaker demand for European and US goods. That will help bring down inflation for a lot of the advanced economies that have been aggressively hiking interest rates.”

Gas Prices: China vs USA

The cost of gas is relatively high in the US. They had gained roughly 28 cents in the previous month as of Monday night, falling just short of the 10-month high of $3.88 achieved last week.

As consumers’ wallets are being squeezed by rising gas prices, this could result in higher headline inflation numbers in the US for August. However, China, the largest consumer of crude oil globally, is making fewer purchases. That might contribute to price stability.

Saudi Arabia shipped 30% less oil to China in July than it did in June. Instead, it appears that the nation is using its reserves. In July, China made a crude oil withdrawal from reserves for the first time in almost three years.