2023-08-10 17:44:57
Have breakfast in a restaurant for the equivalent of less than 40 euro cents, it is now possible in Beijing. For the first time in over two years, the Chine went into deflation last month, that is to say in a period of falling prices for goods and services, once morest the tide of the main world economies.
The consumer price index, which was stable in June, fell by 0.3% year on year in July, the Chinese National Bureau of Statistics announced on Wednesday August 9, following zero inflation a month earlier. For comparison, theinflation was 4.5% in France in June and 3% in the United States.
Hog and auto prices
While the rest of the world struggles with inflation, China, for its part, has been battling serious economic problems since exiting the “zero Covid” policy. “The lifting of the restrictions imposed by the Covid-19 gave a boost to the Chinese economy and there was some hope that this would continue”, analyzes Astrid Nordin, professor at the Lau China Institute, within King’s College London. “A lot of companies have reconstituted their inventory in order to be ready to meet the expected increase in demand. But we see that momentum waning. Today, companies are forced to get rid of their inventories at a lower cost.”
If consumer prices fell last month, it was mainly due to a slowdown in the rise in food prices – in particular pork, the most consumed meat in the country, due to low consumption combined with high supply. Another sector concerned: the automobile. “There is a price war for automobiles, and in particular for the prices of electric vehicles,” explains Jean-François Di Meglio, president of Asia Center and professor at Paris-Dauphine University. “It’s a significant component of the price index.”
On paper, this drop in prices may seem good for the purchasing power of the Chinese, but deflation threatens the recovery. Instead of spending, consumers are delaying purchases hoping for further discounts. Their spending also remains limited, given the small increase in wages and benefits since the lifting of the Covid-19 restrictions, but also the saturation of the labor market.
Deflationary spiral
Without a crystal ball, it is difficult to predict whether China is falling into the trap of a deflationary spiral. The current price drop is “unevenly distributed and relatively weak at this stage”, tempers Jean-François Di Meglio. “We cannot exclude that China is entering a deflationary spiral. But it is still too early to say so.”
The expert prefers to speak of “negative inflation”, because deflation is a “truly systemic phenomenon”, as in Japan in the 1990s. “For ten years, the Bank of Japan printed money, but this money did not go back to real estate or consumption”, relates the expert, who speaks of “cash trap “, a situation in which money is injected in an attempt to revive the economy. “The deflationary spiral has been very virulent.”
To avoid entering the same vicious circle as its Japanese neighbour, many economists advocate a recovery plan in China. “The only way out of deflation would be to massively inject liquidity into the infrastructure”, according to Jean-François Di Meglio, that is to say roads, airports or TGV lines. “It’s something the Chinese know how to do very well, since a whole part of the economy is controlled by the public sector.”
After the global financial crisis of 2008, China had thus invested 4,000 billion yuan (i.e. 586 billion euros at the exchange rate of the time) to stimulate activity. This vast recovery plan had made it possible to significantly develop infrastructure, at the risk of multiplying useless projects and increasing the debt.
Reduction of inflation in Europe?
But today, Beijing prefers to stick to targeted measures and declarations of intent concerning the private sector, without conclusive results. For Jean-François Di Meglio, “if the State refuses to make a recovery plan, it is because the real estate bubble burst the last time it launched one. This real estate crisis has turned into a crisis of confidence. The authorities don’t want this to happen once more.”
In the short term, lower prices in China might have a positive impact for theMondial economy, according to Astrid Nordin, “at least for countries currently struggling with inflation”. “I think this situation might be beneficial for the Europeans and, to a certain extent, the Americans,” she analyzes. “If lower prices trickle down to exports, which is not unlikely, European consumers struggling with what we call a ‘cost of living crisis’ might source cheaper products, which might thereby reducing some inflationary pressures.”
But in the long term, it might represent a threat, with cascading effects: “To align themselves with lower prices, countries that import a lot of goods from China will also want to lower their prices,” explains the expert. To align their prices, companies might thus resort to “staff layoffs, but also a freeze or a reduction in wages, and a reduction in production.”
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