The deflation problem in China is worsening, clearly signaling the country’s economic turbulence.
Will 2024 be the year of China ’s contraction or its rebirth?
For decades the Asian country has continued to grow but now its economy is slowly slowing down, just as the future imagined by Beijing is shrinking. The most obvious sign of the turbulence in which the Dragon finds itself is the worsening of the deflation problem. While Americans are worried about inflation and rising prices too quickly, the leadership of the Chinese Communist Party has to deal with falling prices. In the last three months beyond the Great Wall, the consumer price index has decreased, starting the longest deflationary series since 2009.
According to Business Insider, the advent of deflation is a sign that the Chinese economic model has truly exhausted its vitality and that a painful restructuring is necessary. But beyond the financial problems, the drop in prices could be a wake-up call to a deeper malaise gripping the Chinese people.
For the record, inflation occurs when there is too much demand for not enough products: in this scenario, people want to buy products, but there are simply not enough goods around. In contrast, deflation occurs when there are many goods and services available but not enough demand. Companies are therefore forced to cut prices to entice consumers to go out and spend. The big question concerns the coming months: will falling prices continue to threaten the Asian giant?
The economic nodes of China
China’s main problem, however, remains debt, particularly in the real estate sector, which according to some estimates represents 25% to 35% of the country’s GDP. Years of overbuilding and slowing population growth have caused prices to collapse. The problems in the real estate sector have therefore devastated the balance sheets of Chinese families, many of whom had invested a large part of their savings in real estate. In short, seeing their investments decrease has led the Chinese to stop spending.
As for the aforementioned deflation, deflationary events are rare, but even moderate deflation can stall an economy’s growth for years. Furthermore, in a deflationary economy, debt becomes more expensive to repay because money is scarce.
Japan is a more recent example of a deflation trap. In Tokyo, perhaps, a deflationary soap opera that lasted at least 25 years is coming to an end. After decades of sustained growth, the country’s economy collapsed in the 1990s due to heavy debt and an aging population. Together, these two factors have pushed the Japanese nation towards deflation, kept wages under control, and curbed consumer spending.
Xi’s response
Meanwhile, Chinese President Xi Jinping has urged the country’s judicial and police authorities to safeguard national security, inviting courts, prosecutors, and public security authorities to "defuse" the risks social and economic and to maintain their loyalty to the Communist Party.
In his instructions, the South China Morning Post highlighted, Xi said that the judicial and police departments should "uphold the absolute leadership" of the Party and use their development to support and serve China’s modernization. He further said they should provide strong security guarantees for “the overall progress of building a strong nation and the great cause of national rejuvenation.” Xi also stressed the need to maintain order in the socialist market economy and improve the business environment based on the rule of law.
Meanwhile, Tang Shuangning, the former president of the Chinese state bank China Everbright Group, was arrested on charges of embezzlement and corruption in yet another crackdown launched by Beijing. Tang, 69, was expelled from the Chinese Communist Party earlier this month for violations of discipline and laws, amid a crackdown on corruption in China’s financial sector.
Original article published on Money.it Italy 2024-01-29 07:04:00. Original title: La Cina alle prese con la deflazione: cosa succede oltre la Muraglia
