Macroscope | Cost of falling prices in China greatly outweighs any benefits for rest of the world

Rather than speculating on the possible benefits of Chinese deflation for other economies, the focus should be on threats to the global economy and markets, plus how Beijing intends to revive growth while maintaining financial stability

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Job adverts are seen at the Lonhua Bus Station, which also serves as a recruitment centre for nearby factories, in Shenzhen on August 9. In the eyes of many international investors, China is on the cusp of a Japan-style “balance sheet recession”. Photo: Bloomberg

Published: 3:30pm, 24 Aug 2023

At the beginning of this year, many global policymakers worried that the abrupt reopening of China’s economy would boost demand to such an extent that it would pour fuel on the inflationary fire raging across the world.

Kristalina Georgieva, the head of the International Monetary Fund, said in January: “What if the good news of China growing faster translates into oil and gas prices jumping up, putting pressure on inflation?”

Christine Lagarde, the president of the European Central Bank, warned that China’s reopening “will [exert] inflationary pressure on many of us”.

Fast forward seven months and it is clear that these warnings were a colossal misjudgment of the global spillovers from China’s post-pandemic recovery. Instead of fretting about the possibility of China exporting inflation, central banks and governments in advanced economies are coming to grips with its descent into deflation.

While producer prices have been contracting in annualised terms since October 2022, consumer prices dipped into negative territory last month. The timing could not be worse for China which, in the eyes of many international investors, is on the cusp of a Japan-style “balance sheet recession”, exacerbated by concerns over the timeliness and effectiveness of further stimulus measures.

Some economists believe that falling prices in China are good news for global consumers and businesses, and will help central banks in advanced economies bring down inflation. According to data from JPMorgan, Chinese export prices plunged 21 per cent year on year in the second quarter as firms slashed their prices to attract buyers and stay in business.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | Cost of falling prices in China greatly outweighs any benefits for rest of the world

Macroscope | Cost of falling prices in China greatly outweighs any benefits for rest of the world