Chinese Government’s efforts to revive the economy received a further setback as the economy slipped into deflation as consumer prices declined by 0.3% in July, for the first time since February 2021. This follows decline in factory gate prices and weak export and import data, which indicates that the expected pace of China’s post-pandemic recovery in demand has not materialized.
According to Jim Reid, a strategist at Deutsche Bank, the latest trade data suggests that the Chinese economy was being dragged down by weakness in global demand and a domestic slowdown. Reduced foreign demand for Chinese goods and geopolitical tensions has taken a toll on trade, encouraging international firms to shift investments out of the country.
Weak domestic and global demand has pushed factory gate prices down by 4.4% in July after a 5.4% drop in June, lowering profits for the industrial sector. It was the 10th straight drop. Interestingly, both consumer and producer prices have fallen for the first time in the same month since November 2020. Shrinking profits have led to companies cutting back on investment and pause hiring, while increasing lay-offs.
The shrinking profits are expected to hit the job market also. More than one in five of those between the ages of 16 and 24 in China are already jobless. This does not include the depressed rural labour market. Some university students are intentionally failing in their examinations just to delay graduation.
China’s exports and imports saw a large fall of 14.5% and 12.4%, respectively, in July, raising concerns that the country’s economic growth could slow further this year. July was the 3rdmonth in a row that China’s shipments overseas declined, marking the sharpest fall since February 2020. Falling imports of major commodities such as crude oil, copper and iron ore in July indicate that the economy is struggling.
With the economy moving into deflation territory, the central government’s efforts to tackle local government debt, which surpassed USD 18 trillion last year, would also receive a setback as falling prices would make it difficult for China to lower debt, especially of local governments. The crisis in the property market is already hurting the finances of the local governments.
Agriculture in China has also been hit by floods and drought, contributing to widespread crop failures. Already the summer grain yield has seen a fall of 0.9% compared with last year, the first such decrease in years. According to Shi Heling, an Economics Professor at Monash University in Melbourne, the impact of recent natural disasters has dealt a ‘huge blow’ to the Chinese economy.
In order to avoid any negative sentiment regarding the slowing economy among domestic and foreign investors, Chinese authorities have reportedly ordered high-profile local economists, media houses and others to avoid discussing negative trends in the economy such as deflation, capital flight, etc. With official data not reliable, this would make it difficult for investors to get reliable data from other sources as well.
With the economy slipping into deflation, there have been calls on the authorities to announce more stimulus measures. However, China’s new economic team seems to have few tools to provide meaningfully stimulus and revive the economic growth.
The authority’s hands are tied as any major stimulus measures could exacerbate the country’s growing debt risks. With the Chinese economy facing headwinds such as weak housing market, diminishing investment by foreign firms, lower domestic and global demand, major stimulus measures are not expected.
The slipping economy is of major concern to the Chinese leadership as economic success has always been a key pillar of legitimacy for the Communist Party. Negative sentiment about the economy could push Chinese corporates and investors to disinvest and de-leverage due to falling revenue generation. Issues impacting the youth and the old such as youth unemployment, falling pensions, lower medical facilities has the potential of increasing social unrest in China.