China is facing a hard, lasting economic rebalancing, nine quarters so far of a declining GDP deflator. This unfortunate trend reflects the country’s continued battle with deflation. It has persisted for three years—its rarely seen example of economic contraction since the reforms launched in the late 20th century. The effect of this deflation has been devastating. It ripples through industrial outputs, consumer prices, and the overall economic sentiment throughout our vast country.
As the world’s largest industrial economy, China has a tremendous capacity to manufacture and ship nearly every good there is. Yet the present economic climate has created a loathsome and unprecedented jump in bankruptcies at industrial companies. Official data indicates that the share of loss-making industrial units has reached a record high since 2001. This further underscores a worrisome trend of chronic distress in the manufacturing base. Newly published statistics show that producer prices fell by 2.3 percent from August to September. This decrease contributes to an astonishing thirty-six consecutive months of decreasing factory gate prices.
The stoic, apolitical truth is that the whole economic landscape is made all the more complicated by China’s nominal growth, which essentially sits at a pathetic 3%. This figure stands in stark contrast with the headline GDP, which could still meet the official target of 5%. This gap illustrates the chasm between boosterish growth on paper and the difficult inflation-wrought economic realities most businesses and consumers are beginning to feel. Real CPI—consumer prices adjusted for inflation—have suffered, decreasing by 0.3%. At the same time, the new core inflation measure—which woefully strips out both food and fuel—is almost ludicrously low at 1%.
The Chinese government is taking aggressive action to address the country’s economic challenges. Additionally, they lowered their Consumer Price Index (CPI) goal for 2025 to approximately 2%, the lowest target established in more than 20 years. This change is intended to reflect the continuing deflationary effects on the program. It imparts a lesson for more sanguine economic forecasts in the months ahead. The notion of a “profit famine” has emerged, encapsulating the struggles of industrial firms as they navigate this challenging environment.
The story of deflation in China is deeper than the numbers. More than anything, it has fostered a broad anti-business mood and cultural climate that shapes consumer behavior and erodes business confidence. The mood, though, is one of wait and see, as consumers and investors alike prepare for more bad news on the economic front. All at a time when so many still required to recalibrate their business plans, typically resulting in scaled-back spending and growth aspirations.
The potential seeping in from this new phase of deflation runs much deeper to what China’s longer term economic path looks like. It growth is based especially on industrial firms that report big gains in loss, the sustainability of that growth is called into serious question. The government is under growing criticism to announce specific and impactful steps to boost demand and kickstart the economy. Those strategies could include raising government expenditures or subsidizing consumer purchases to mitigate a possible deflationary spiral.