Amid diminished demand, both domestically and internationally, the Chinese economy has experienced a state of deflation. The country's consumer price index registered a year-on-year decrease of 0.3 per cent, as reported by the National Bureau of Statistics (NBS) on August 9. Additionally, the producer price index (PPI) had encountered its 10th consecutive month of decline, reflecting a 4.4 per cent drop compared to the previous year
Deflation is a prolonged, widespread decrease in prices within an economy. While major economies battle stagflation (low growth-high inflation), China faces stagnation (low, non-existent or negative growth), triggering economic concerns
China's economy initially rebounded swiftly after COVID-19 restrictions, but consumer demand remained weak. Key indices, such as the consumer price index (CPI) and producer price index (PPI), slid into deflationary territory in July, reflecting a decline in prices and overall growth of the country
Deflation raises public debt, encourages consumers to delay purchases, dampens demand, and hurts companies' profits. It can lead to job cuts, reduced exports, economic contraction, and financial instability
Traditional solutions to counter deflation include tax cuts, increased government spending, rate cuts and monetary easing. The right mix of these measures can help combat deflation's adverse effects like a recession or depression
China's central bank, People's Bank of China (PBoC), had prioritised stability in earlier months 2023. However, the absence of clear countermeasures raises concerns about economic contraction and instability. Even after cutting a key interest rate by 10 basis points to 2.65 per cent to boost the growth, the economic conditions are not yet ready to get steady
Liu Guoqiang, Deputy Governor of China's Central Bank, reassured in June that deflationary risks would not persist in China during the latter half of the year. He acknowledged the need for time as the nation strives to recover from the repercussions of the COVID-19 pandemic
China's role in global trade and exports is substantial. Its transition to deflation could impact industries in several other countries, forcing cutbacks on investments, which could further lead to a deteriorating economic situation in those countries as well
India's economy faces challenges due to reduced Chinese imports of essential commodities like copper, mineral oils, iron ore, and cotton yarn. If the prices spike, it could lead to spike in the prices of products that are depended one such raw materials in India
Technological breakthroughs can trigger a longer deflation by reducing costs through replacing humans with A.I's and other advancements
The unprecedented printing of dollar by American Federal Bank, Russia-Ukraine conflict, and post-COVID recovery slowdown in manufacturing majorly caused global inflation. IMF expects inflation to decline worldwide in the coming months, and highlights Fed's role in managing inflation is vital for stability
China's deflation has set forth a complex scenario with potential repercussions for global economic stability, growth trajectories, and financial strategies. Monitoring China's response and global cooperation are essential for a balanced recovery around the world