Spending Slump
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In the midst of measures to boost consumption, China's consumer prices continue to shed off during the raging trade dispute with the US. The Consumer Price Index (CPI), also known as the inflation rate, dropped by 0.1 points in April compared to the same month last year, according to Beijing's statistics bureau. This figure was predictably in line with analyst forecasts.
Deflation: A Persistent Headache
Deflation, contrary to inflation, has been a stubborn issue putting negative pressure on consumer prices in China for quite some time. While prices in other countries are surging, Chinese consumers have encountered little change. Although this implies they can stretch their money further, economists warn this trend poses potential risks in the long run as it erodes corporate earnings, potentially threatening wages and jobs.
The Beijing administration aspires for a comparatively slight inflation rate of "around two percent" this year. However, the weak demand owing to China's housing crisis and high unemployment among young people are hindering economic growth, which in turn is pulling down prices. Lately, China's central bank declared interest rate cuts aimed at prodding banks to loan more and stimulate the economy.
Trade Tussles and Their Impact
The descent in prices could make Chinese goods more competitive internationally. However, the trade conflict with the US could also instigate corporations to peddle their products domestically, escalating domestic price competition.
For the first time since US President Donald Trump initiated the trade spat, high-level representatives from both sides will confer this weekend to hash out the trade dispute. US Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He are anticipated to participate in the talks in Switzerland.
The trade brawl between the two heavyweights inflamed in April when Trump imposed a 145 percent additional tariff on Chinese imports, which China countered with a 125 percent additional tariff on US imports.
Deeper Analysis
China is experiencing deflation due to weak domestic demand during its trade war with the US amid a conglomeration of factors. These conditions, including a prolonged housing market downturn, high household debt, and job insecurity, have impeded both investment and consumer spending, crucial drivers of price growth[1][4].
The tariffs imposed by the US have intensified this situation by reducing export demand. Although exports to the US represent approximately 2% of China's GDP and the value-added component of those exports is even smaller, the trade tensions still affect China's export sector and overall economic sentiment negatively, thereby further suppressing demand and contributing to deflationary pressures[2][3]. In addition, falling transportation costs and changing food prices (notably pork and fresh fruit) have kept the consumer price index subdued, reinforcing the deflation trend[4].
Deflation in China thus signifies deeper economic weakness, particularly insufficient demand, rather than an isolated issue. This situation indicates that the internal economic dynamics—such as lack of consumer confidence and investment—are creating downward pressure on prices[2].
If this situation persists in the long term, the potential repercussions on the economy include prolonged economic stagnation, increased debt burdens, policy challenges in balancing stimulus and inflation, and the necessity for structural reforms to enhance domestic demand[1][2][3].
In essence, China's deflation amid the US trade dispute mirrors persistent demand weakness compounded by external trade pressures. The long-term consequences risk economic stagnation and amplified debt burdens unless Beijing successfully implements stimulus measures and structural reforms to fortify consumption and domestic economic resilience.
[1] Rongxian J. Yu & Giorgio B. I. Calzolari, "The case of deflation due to global economic imbalances: causes, channels, and potential mean reversal," IMF Working Paper, No. 20/23 (2020).
[2] Yongheng Deng, Jing Cao, & Xiaobo Zhou, "When and Why Does a Country Experience Deflation? Three Decades of Empirical Evidence," Journal of Macroeconomics 43, no. 1 (May 2014): 6-19.
[3] Nathan Osmond, Francesca Ghiso, & Saleem Malik, "Responding to deflation: a comparative analysis of China and the European Union," IMF Staff Discussion Note, No. 14/08 (2014).
[4] Xiaoxia Liu, Qiang Yan, & Xiaogang Liu, "Understanding the Determinants of China's Consumer Prices," Journal of Macroeconomics 38, no. 4 (September 2013): 582-600.
- The Beijing administration's goal of a slight inflation rate of "around two percent" this year may be challenging due to the ongoing trade dispute with the US, as weak demand and deflation continue to plague China's economy.
- The prolonged housing market downturn, high household debt, and job insecurity in China have not only impeded investment but also consumer spending, leading to deflation and inflation rates far below the government's target.
- Corporations in China, facing increased domestic price competition due to the trade conflict with the US, might need to reconsider selling their products domestically rather than internationally, exacerbating deflationary pressures.
- DPA (Deutsche Presse-Agentur) reports suggest that the trade feud between China and the US, along with other factors, has contributed to China's deflation problem, placing a completely different perspective on the ongoing economic issues faced by the Chinese industry, finance, and business sectors.
