According to data released by the Chinese National Bureau of Statistics on Wednesday (September 10), the Consumer Price Index (CPI) for August showed a year-on-year decrease of 0.4% in China, the largest drop in six months, exceeding expectations.
Economists analyzed that China’s deflation has already sunk into a negative spiral from which a change is unlikely to be seen in the short term, potentially requiring a lost decade of economic growth before a turnaround is possible.
The data released by the Chinese National Bureau of Statistics on Wednesday also showed a significant decline in food prices, with a year-on-year drop of 4.3% in August, higher than the 1.6% decline the previous month, dragging down overall price levels. The core CPI (excluding food and energy) increased by 0.9% year-on-year, higher than July’s 0.8%, reaching a two-and-a-half-year high.
The Consumer Price Index is a key indicator used to measure inflation or deflation. Data released by the Chinese National Bureau of Statistics website indicates that China is deep in deflationary gloom.
In response, Wang Guochen, a research assistant at the mainland China Economic Institute of the China Economy Institute, stated in an interview with Dajiyuan that China’s deflation was actually predictable. The main reason lies in the shift from virtual to real economy, leading to a reduction in job vacancies in the service industry, making employment more difficult. Most people, especially the younger generation, are without jobs and consequently lack purchasing power.
Secondly, in order to maintain a certain level of employment, zombie companies (bankrupt enterprises) continue to operate, creating a certain level of production capacity. With a certain level of production capacity coupled with weak purchasing power, prices continue to decline.
In response to the bleak economic data officially announced by the Chinese government, Premier Li Keqiang mentioned in this year’s Government Work Report the need for comprehensive rectification of “internal competition”.
Wang Guochen believes that Li Keqiang’s anti-internal competition measures will not be very effective because shutting down industries with excess production capacity will lead to rising unemployment rates and bad debt for banks. Therefore, it is impossible to completely eliminate these zombie companies, and deflationary conditions will continue.
According to reports by Deutsche Welle, in recent years, major Western economies have been striving to address inflation issues. Conversely, Beijing has had to deal with stagnant domestic consumption due to the prolonged downturn in the real estate market and increasing challenges in exports, leading to price stagnation or decline.
The report also mentions that the deflationary trend has dampened investor confidence and threatens Beijing’s official growth target of around 5% for this year.
Fanjiazhong, a professor of economics at National Taiwan University, stated to Dajiyuan that China has been experiencing deflation for over 20 months, with economists initially predicting it as a long-term trend rather than a short-term anomaly.
“Deflation generally lasts for a long period of time. It reflects that your economy has fallen into a negative cycle like a vortex, making it difficult to escape once caught in the deflation cycle.”
In the early 1990s, Japan’s economy collapsed due to the bursting of the bubble, leading to stock market crashes, falling property prices, and deflation that lasted for 30 years of economic adjustment.
Fanjiazhong mentioned that taking Japan’s “Lost Thirty Years” as an example, it took Japan 30 years to start seeing some changes in their economy only in the recent year.
Wang Guochen stated that in the past two years, foreign investments have been exiting China and flowing back to various countries, including Taiwan and Japan. Only after returning to Japan did this gradual exit of foreign companies help resolve Japan’s deflation problem.
Rory Green, Chief China Economist at GlobalData.TS Lombard, recently wrote in a report that China is indeed heading into a lost decade of economic growth. This assessment comes as concerns mount about the inability of the world’s second-largest economy to achieve a convincing recovery after the pandemic.
Green also believes that China’s current situation mirrors Japan’s economic stagnation following the bursting of the asset and credit bubble in the 1990s.
Green states that China’s economic slump is partially man-made, as authorities attempt to address past overexpansion, particularly in real estate and local government debt.
Alicia Garcia Herrero, Chief APAC Economist at Natixis, warned in a webinar held in July that research on 2,500 listed companies in China by Natixis highlighted a situation where trading volumes are increasing but values are being pressured by deflation.
She added that while these companies may seem dominant in the market, they are actually paying a high price as they are unable to generate the necessary income to sustain ongoing operations.
Jianwei Xu, Senior Economist for Greater China at Natixis, also cautioned during the webinar that the situation in the second half of the year could be more severe. He stated, “We see that profits of manufacturing companies, in particular, are still declining.” “More families may face pressure in the second half of the year as it becomes increasingly difficult to find jobs.”
According to recent reports from The Wall Street Journal, over the past decade, Xi Jinping has had numerous opportunities to revive the Chinese economy, but each time he chose to strengthen state control instead of implementing many reforms deemed necessary by Chinese economists. While some of China’s economic problems existed before Xi Jinping took office, he has not resolved them.
The Wall Street Journal pointed out that a consultancy prepared a report for top Chinese leaders suggesting that without urgent measures to revive economic growth, China could spiral into deflation, much like the misfortune the United States faced during the Great Depression.
However, according to reports, “Xi Jinping remains unconvinced.” Insiders close to decision-makers in China revealed that Xi Jinping had asked his advisors, “What’s wrong with deflation? Don’t people like cheaper prices?”
It is widely known that deflation leads to a vicious cycle of price declines and weakened demand, but insiders say Xi Jinping’s dismissive attitude has made deflation almost a taboo topic in top Chinese decision-making circles.
Fanjiazhong stated that this opinion completely lacks basic economic knowledge, likening it to the views of housewives and uncles in the vegetable market, going against the opinions of macroeconomic professionals.
“Deflation is actually a very dangerous macroeconomic crisis. From many perspectives, deflation is even more dangerous than inflation.”
Fanjiazhong further explained that in 2021, the United States quickly resolved its inflation through tight monetary policy. Inflation can come and go quickly, but deflation? How long did it take Japan to resolve it? The problem China is facing now is very difficult to rectify.
So, how long is the mainland China expected to experience deflation before the economy can adjust? Fanjiazhong believes that there is no foreseeable opportunity for change in the short term, and it is anticipated that this deflationary phenomenon will persist for at least five to ten years before a reversal is possible.