China’s deflation worsens: what are the reasons of China’s crisis?

Lorenzo Bagnato

11 December 2023 - 13:00

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China’s economic performance and trading activity keep worsening. How is it possible?

China's deflation worsens: what are the reasons of China's crisis?

Deflation in China worsens as the East-Asian giant experiences the 14th consecutive month of CPI and PPI decline. Trade and economic activity continue to decrease in the world’s largest exporter and second-largest economy. But why is China’s economic doing so poorly?

Deflation is an economic phenomenon whereby prices keep declining, weakening consumer spending and purchasing power. A price decline provokes a decline in wages, investments, and government spending. All combined, this leads to stagnating economic activity and slow-growing GDP.

The opposite of deflation is inflation, when prices rise too much and outpace wages and investments. This devalues the currency and, once again, weakens economic activity. The sweet spot most economies want to reach is a slow inflation of 2%, considered the target of many contemporary central banks.

While the United States, the Eurozone, and the United Kingdom battle high inflation, China is currently experiencing the opposite problem.

In the West, central banks are desperately trying to bring down inflation by raising interest rates. In the United States, rates have reached 5.5%, and in Europe a record 4%. Inflation in the US is declining but not fast enough, hovering around the 3% mark, while in the Eurozone consumer prices have plummeted in recent months, reaching 2.4% in the latest reading.

On the other hand, Chinese interest rates have remained negative to stimulate the economy. China had a longer period of economic stagnation due to long-lasting Covid restrictions. When all restrictions were lifted in December 2022, economists hoped for a fast growth similar to the West in 2021. But that, unfortunately for China, did not happen.

Can China be isolationist?

China is the largest export economy in history. It became the fastest-growing country by exporting all sorts of products, from low-specialization textile fabric to high-end, extremely sophisticated digital devices. China became a competitor in any industry.

However, this might be coming to a grinding halt as trading activity with the rest of the world is taking a downturn. This is partly due to a decline in consumer demand, namely Germany and its economic crisis, and partly due to a policy of isolationism carried out by the Chinese Communist Party.

The United States under Donald Trump declared a trade war against China. When Joe Biden stepped into the White House, he changed many things about the previous administration, except for this one. Biden doubled down on the trade war, restricting exports to China of American microchips.

Adding into the mix the worst real estate crisis in Chinese history, and the end of China’s growth appears inevitable.

As a result of all these troubles, the US economy will likely grow faster than China’s in 2023. The “Chinese century” might have ended before it even started.


# China

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