Title: China Faces Economic Challenges as Deflation Hits the Country
Date: August 10, 2023
Amidst a series of economic setbacks, China has entered a period of deflation as its household consumption remains sluggish, exacerbating concerns about the country’s ability to revive its economy. The grim economic situation reflects the challenges faced by the Chinese government, whose previous policies have left public finances exhausted. Economists are now questioning if the government’s current measures will be sufficient to bring the economy back on track.
The deflation became apparent in July when China’s consumer price index recorded a 0.3% decrease, marking the first decline in over two years. Economists fear that this trend may persist, as the average price increase for the first seven months of the year was only 0.5%, far below the target increase of 3% for 2023.
Deflation poses a significant hurdle to economic recovery, as it can lead to a vicious cycle where consumers anticipate further price decreases and delay their purchases. According to experts at Trivium Consulting, consumers are refraining from spending due to slowing income growth and uncertain economic prospects. If these issues remain unresolved, it is unlikely that consumption will rebound significantly.
The impact of the economic slowdown is most heavily felt by young people in China, with July’s unemployment rate reaching a record-breaking 21.3%. Furthermore, the decline in China’s export and import volumes worsened in July, with exports falling by 14.5% and imports by 12.4%. These figures suggest that global economic conditions, including inflationary pressures in Western countries and risk reduction policies implemented by other nations, are contributing to China’s economic woes.
Recognizing the challenges, the Chinese government recently acknowledged that the economy is facing new difficulties, primarily due to insufficient domestic demand. To address this, the government has pledged to strengthen counter-cyclical adjustments. However, economists argue that these measures may not be sufficient, considering the country’s already extensive public debt and large budget deficit.
The real estate sector, which accounts for a quarter of China’s economy, also faces a crisis due to aggressive debt reduction efforts and the cleaning up of accounts of real estate developers. Sales performance among the top 100 developers fell by 33% compared to the previous year. Local governments have attempted to stimulate the market by making it easier for the public to purchase homes, but these efforts have been met with hesitation.
Despite setting a relatively low economic growth target of 5% for this year, economists and experts doubt China’s ability to achieve it without major stimulus measures. The depreciation of the renminbi adds to these concerns. However, the government is wary of announcing further stimulus measures, given the country’s already sizable deficit and public debt, which stands at 100% of GDP.
Critics argue that the Chinese government tends to downplay unfavorable economic indicators, presenting an overly optimistic picture. For instance, in June, when signs of deflation began to emerge, the spokesperson for the China International Bureau of Statistics, Fu Linghui, asserted that there was no deflation in China, only for deflation to become evident later.
China’s economic challenges call for alternative approaches to information dissemination. In response, the “Looking China” website has launched a recruitment drive to gather 10,000 honorary members from Chinese people worldwide. These members will pay a subscription fee to access the website, which aims to bypass censorship and provide independent and accurate information to their compatriots in mainland China during times of crisis.
As China’s economic situation remains uncertain, it is yet to be seen whether the current measures taken by the government will be sufficient to stabilize the economy and bring about a revival.
Source: Faguang