China’s Deflation Means It’s Now or Never for Saving the Economy

by | Sep 13, 2024 | Markets

Hi, I’m Philip Glamann in Beijing.

Worries about falling prices and the threat they pose to the world’s second biggest economy are reaching a crescendo.

Specifically, people are concerned that if the Chinese government doesn’t act quickly to address deflation, the economy could suffer permanent damage.

Falling prices have the potential to trigger a downward spiral as households facing reduced incomes spend less or postpone purchases because they expect prices to decline even further.

Corporate revenues would also suffer, stifling investment and leading to more salary cuts and layoffs. There are already signs this spiral is in motion, with some entry-level salaries dropping from a high two years ago.

The crisis of confidence is hitting equity markets, sending a key gauge of Chinese stocks to the lowest since early 2019 this week.

And in a sign Chinese leader Xi Jinping is worried, this week he urged officials around the country to do their part to help the nation hit its growth target — a call that comes as economists cast doubt over the nation’s economic momentum.

China doesn’t want public discussion of deflation – a sure sign policymakers are worried – and have warned analysts to avoid using the dreaded D word. Still, last week former central bank Governor Yi Gang said rooting out the problem must become a priority.

Other nations have been in China’s predicament. One frequent comparison is Japan in the 1990s, when grinding stagnation followed a burst bubble in real estate and financial markets. That situation famously resulted in Japan’s “lost decades.”

Yet in some ways South Korea toward the turn of the century may be a better comparison. In terms of per capita gross domestic product and urbanization levels, China now and South Korea then look pretty similar in that there’s room to grow.

Shu Jiapei, an analyst at China’s SDIC Securities, put it this way: “Japan in the 1990s was like a middle-aged person. Korea in 1998 and China today are no longer teenagers, but they’re still in their youth and could still grow a few centimeters taller and become stronger.”

The challenge for policymakers in Beijing is to kick-start engines of growth to offset the economic drag from the troubled property market. They’ll also have to deal with regional governments scaling back their dangerous debt burdens.

Xi is placing his bets on tech innovation to drive a transformation of the economy. Think electric vehicles, solar panels and lithium-ion batteries.

But China is, obviously, much bigger than South Korea, and its massive disruption of industry around the world has irked the US and other developed countries.

This helps explain why Beijing has warmly embraced the Global South, a term for developing nations around the world. China hopes markets in places like Africa will snap up all those EVs and solar panels.

That strategy comes with its own challenges because those countries don’t just want to be customers; they also hope to make goods for China to buy. This mirrors the issue Beijing faces with Washington, and neither side seems to have a solution yet.

Whether China’s strategies work out remains to be seen, but what’s clear is that the pressure is mounting on decision-makers in Beijing by the day.

What We’re Reading, Listening to and Watching:

Heartbreak

China has said it wants better and more exchanges with Americans but adoptions won’t be a part of that.

Beijing has said overseas families can no longer adopt Chinese children, officially ending an area of rare cooperation that saw tens of thousands of youngsters find families in the US.

China didn’t explain the decision beyond pointing out it was in line with international conventions but it appears to take effect immediately, meaning the hundreds of cases involving US families are likely finished.

That’s causing a lot of heartbreak for people like Penelope, a 10-year-old girl, and 47-year-old Aimee Welch, whose family lives in the US state of Kentucky.

“I got the news via email while sitting in my car and just wept,” said Penelope’s prospective adoptive mother.

Beijing’s decision followed similar ones in recent years by countries like Kazakhstan, Russia and Ethiopia. China’s lack of explanation — reflecting a general affinity for opacity from the ruling Communist Party — left many speculating about its intentions.

Guo Wu, associate professor of history at Allegheny College, said “it truly fulfills a Chinese sense of assertiveness that ‘We can take care of our orphans well and we don’t need to send them to the West.’”

A rapidly aging population may be a factor for decision-makers in Beijing. They are confronting one of the world’s biggest demographic challenges, with the nation facing the prospect of 30% of its population being age 60 or above by 2035.

That dynamic is a threat to the slowing economy, prompting officials try to bolster the workforce, such as possibly raising the retirement age.

Of course, China’s decision comes as ties between Beijing and Washington are, shall we say, imperfect. Washington is trying to cut Beijing off from advanced chip tech that could lead to advances in AI, while Beijing has launched an anti-spying campaign that casts a dark shadow of suspicion on foreigners.

Despite that, Myriam Avery, executive director at Agape Adoptions, a placement service in Washington state working with affected families, urged China to reconsider its decision.

“Historically, we have really kept politics out of child welfare,” she said. “Nobody can ever convince me that leaving a child in an orphanage is in their best interest if they have an opportunity to have a family.”

Pricey Phone

$2,800

That’s the cost of a three-panel phone from Huawei that promises to fit a 10-inch tablet in a person’s pocket. The device underscores how Huawei is focused on hardware engineering while other companies like Apple are pushing AI features on their products.

Behind the Great Firewall

A weekly look at an item that’s been big water cooler news in China.

China’s nationalistic bent reared its ugly head again this week but the public, government and state media signaled they weren’t buying it, at least this time.

The episode involved a spat between a Chinese influencer and two Japanese tourists at Yuanmingyuan, also known as the Old Summer Palace, in Beijing.

Words were exchanged over sharing a spot for taking photos at the scenic area. The influencer who goes by Yaren then apparently followed the visitors around loudly proclaiming he’d never make way for Japanese people.

The incident would seem to have all the ingredients needed for the latest outrage that Chinese diplomats say had hurt the feelings of a billion people: tourists from a country that invaded China in the 1930s, a national treasure destroyed by French and British troops in the 19th century, a fearless individual willing to stand up for his once-humiliated nation.

Nationalism is a double-edged sword for the regime in Beijing. On the one hand, the government finds it a reliable way to rally the people. For example, hints of that tactic are at play when Chinese diplomats howl loudly about Japan’s handling of wastewater from the wrecked Fukushima nuclear plan.

On the other hand, nationalism can get violently out of hand. Earlier this year, a Japanese mother and her child were attacked by an unemployed man with a knife, an incident that left a Chinese woman dead.

Excessive crowing over, say, a nice domestically made phone or the production of a controversial map that hands China ownerships of lands and seas annoy neighbors who are valuable trade partners. Such provocations can have economic consequences down the road.

So it was a good sign that Yaren’s antics weren’t lauded in China. A magazine backed by the Communist Party mouthpiece People’s Daily wrote that “blind xenophobia has no soil to grow in our country.” And a Foreign Ministry spokesperson said that “China is an open and inclusive country, and we do not have in place any discriminatory practices against any particular country.”

Chinese people also took to the internet to criticize the influencer, with one post saying he was just “deliberately trying to provoke.”

This won’t be the last bout of nationalist sentiment expressed in China, and the government will surely continue to use one of its favorite tools for garnering public support. Still, it’s heartening to know there are limits.

Written by: Bloomberg News @Bloomberg

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