China is in crisis for the opposite reason of the West: deflation. Every developed economy is facing economic hardships.
While the Western world is slowly grinding out its fight against inflation, China seemingly has the complete opposite problem: deflation. Fresh economic data on Wednesday revealed a steeper fall than expected in Chinese consumer prices.
Deflation is an economic phenomenon where prices are too low, hampering economic growth. Coupled with other economic hardships, the Chinese economy appears in crisis as much as other developed nations.
Immediately following the Covid pandemic, Western consumers rushed onto the world market with their two-year savings and high willingness to spend. This caused sudden inflationary trends, made worse by stronger-than-usual monetary stimuli and soaring energy prices due to the Russian invasion of Ukraine.
In China, where pandemic restrictions have been completely lifted only in early 2023, the opposite appears to be happening. Consumer prices plummeted by 0,3% in July, while producer prices fell by 4,4%.
Markets are worried China is entering its "lost generation" period, similar to how Japan stagnated after a period of skyrocketing growth. In Japan, prices stabilized and the economy slowed down, though it remained a significant geopolitical and economic global player.
Others say the comparison with Japan is premature. China’s deflation might be caused by a steep fall in energy prices as Russian oil imports increased. After the European Union shut down market transactions with Russia, the Kremlin was forced to sell its oil and gas to China, which could purchase it at a fraction of the price.
Trade isolationism
The fact of the matter, however, is that China is increasingly isolated from Western trade. Exports have fallen by 14,5% and imports by 12,4% in July. Industrial output is at its lowest level since the Covid pandemic and the manufacturing sector is increasingly weaker.
China is also dealing with the "controlled bankruptcy" of Evergrande, the heavily indebted real estate producer. Evergrande declared an additional $81 billion in debt in June, signaling a sudden collapse.
These issues are exacerbated by the United States trade war with China. The Biden administration is shutting down vital chip exports to Beijing, extending the technological gap between the world’s largest economies.
China recently responded with restrictions on key chip-making metals. The two countries appear to be waging an economic attrition war, and the United States currently has the upper hand.
But China’s isolationism could damage the West in the long run. China is a massive country with immense internal demand, and cooperation with Russia could essentially make them self-dependent. Western economies, on the other hand, have an intertwined economic relationship with China, whose seizure could cause financial havoc.
In any case, the United States, the European Union, and China all appear on the brink of an economic crisis. The future looks grim for the global economy.
