China’s economy is facing deflation – and President Xi Jinping is facing a major problem. The Yomiuri Shimbun via AP Images
The economic situation in China is worse than expected, Desmond Shum told the New York Times.
Even basic products are unsellable as consumer prices are close to deflation.
This will lead to tighter scrutiny of businesses by Beijing as it becomes increasingly unsafe.
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According to Desmond Shum — once at the helm of a billion-dollar construction company that he left in 2015 due to tighter Beijing scrutiny — sales are falling across all industries. This is happening even in industries that were expected to be spared a slowdown. The economic prospects for Chinese consumers are so poor that executives have reported flagrant acts of theft by their employees, Shum said.
“Some things shocked me in conversations with businessmen in China,” he said. “A large dairy company produces more milk powder because people are buying less milk. Usually this is one of the last things you would cut down on.”
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China faces deflation
Shum’s description of conditions on the ground in China offers a glimpse into the country’s sluggish growth. China’s post-pandemic recovery has stalled dramatically since the first quarter.
Latest data shows that China’s producer price index fell last month at its highest level in seven years, while consumer prices fell for the first time since 2021 are on the brink of deflation.
The stuttering economy has also made itself felt in the increasing unemployment among the country’s youth: In May were over 20 percent of 16 to 24 year olds unemployed. At the same time, the debt burden continues to weigh on the real estate market, further complicating renewed economic growth.
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“There will not be one country to replace China, but…”
These factors have already prompted Beijing to act by telling the People’s Bank of China rate cuts made to restart economic activity.
However, Shum said the conditions are also unsettling the country’s top executives, leading to tighter scrutiny of the country’s business landscape, particularly of foreign firms. For example, companies with western connections are threatened with raids, while foreign companies face new data restrictions.
This is helping international firms withdraw significantly from China, which has the potential to shift the current trade regime away from the country, he said.
“People are talking about ‘Deglobalization‘ but the correct term is ‘reglobalization minus China,'” Shum said. “There will not be one country to replace China, but activities are spreading to Vietnam, Indonesia, Sri Lanka, India and other countries.”
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