Opinion
Mint Quick Edit | Deflation is bad news for China’s economy
Summary
- Falling prices tend to weaken demand, hurt growth and deter credit uptake—all of which can form a doom loop. Will Beijing’s fiscal stimulus fend off that threat? Factory cutbacks may be needed too.
Even though policymakers in Beijing may be putting up a sanguine show, not all is well with China’s economy. Its latest official data reveals that prices in China fell 0.7% from a year earlier in February, marking the first time in more than a year that the economy is in the grip of deflation.
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Its producer prices also declined 2.2% last month. While cheaper goods may sound good from a consumer perspective, it can be a bigger problem for the economy than high inflation. Deflation leaves consumers with no incentive to spend as they anticipate further price drops, which weakens overall demand and drags economic growth down.
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It also makes borrowers wary of credit, as loans to be repaid enlarge in real terms, with low interest rates unable to provide succour beyond a point. In such a situation, policymakers need to stimulate demand.
China has announced a fiscal stimulus that would take its deficit to 4% of GDP this year, up by a whole percentage point.
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While this might encourage consumption, US tariff barriers could shrink Chinese exports and worsen the threat of overproduction by its factories. Supply cutbacks may help—and also ease fears elsewhere of Chinese dumping.
