China’s Economy Could Be Set To Dim Some

China’s Economy Could Be Set To Dim Some
Daniel Johnston

8 months ago2 mins

What’s going on here?

Data out on Monday showed that China’s economy could be set to get darker, with deflation looming overhead.

What does this mean?

Western economies are currently beating inflation off with a stick, but China's got a completely different problem: potential deflation. See, June’s consumer prices didn't budge at all compared to last year – and they’ve actually dropped by 0.2% since May. And the picture only gets bleaker when you look at producer prices: they just fell 5.4%, in the biggest drop since 2015. And while those cut-price deals may sound like any shopper’s dream, it’s a sign that demand for consumer and manufactured goods is super weak across the board. That doesn't bode well for China's economy, spurring more speculation that the government will need to jump in with some stimulus to try and shore it up.

China CPI and PPI

Why should I care?

For markets: On the ledge.

Deflation is an economist's worst nightmare, and with good reason. See, when shoppers notice that prices keep trending downward, they hold off on big purchases – reasoning that the price tag will be lower later on. And when a ton of people do that, then demand falls, prices slip further, and the issue – and the economy – can spiral. Given that danger, it wouldn’t be a big surprise if the Chinese government stepped in: back in 2009, the last time China faced a long spell of consumer price deflation, it launched a stimulus program worth over $500 billion.

The bigger picture: Tracking the Thucydides trap.

Hopes of extra stimulus helped to buoy Chinese markets on Monday, but that potential cash injection wasn’t the only factor at play: there was also the visit that the US Treasury Secretary paid to China in recent days. That headline-grabbing trip boosted hopes that tensions between the two countries might be set to thaw – especially given the Treasury Secretary’s fair words about both countries having enough space to thrive and trade with each other.

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