China continues to battle with deflation into the new year, with the newest statistics from Beijing showing consistent negative growth among both the consumer and producer prices indices (CPI and PPI), exacerbating what analysts say is a balance sheet recession for the country.
According to statistics released by the People’s Republic of China (PRC) National Bureau of Statistics, CPI fell 0.8 percent in January year-on-year from 2023, while PPI fell by 2.5 percent.
China’s PPI had seen its 16th consecutive month of decline, while its CPI has been shrinking for four months straight. The costs of food products such as fruits and vegetables, eggs, and meat shrank by significant percentages; vehicle prices dropped by 5.6 percent. Notably, tourism grew by 1.8 percent.
As prices fall, producers are also seeing reduced profits that translate into pay cuts and fewer job opportunities. Major industries saw a 16-percent hit to the prices of goods right out of the factory.
‘Balance sheet recession’
The PRC has seen significant deflation since the lifting of “zero-COVID” lockdown measures in late 2022, with the economy not experiencing the expected recovery in the wake of the pandemic.
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With deflationary pressures dragging on, Beijing stands to see a worsening “balance sheet recession,” analysts with the SinoInsider political risk consultancy say.
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This is because protracted deflation will “keep up real interest rates, which in turn makes residents and businesses less willing to consume and invest,” the firm wrote in the Feb. 19 issue of their newsletter.
Both residential and business investors have been “unwilling to spend and invest,” preferring to save their money or place it in low-risk assets.
“This trend has persisted into 2024, with a recent People’s Bank of China report showing that the deposits of non-financial enterprises had increased by 1.14 trillion yuan in January, compared with a decrease of 715.5 billion yuan over the same period last year,” SinoInsider wrote, noting that at the beginning of 2023, businesses across the country were still optimistic about China’s chances of economic recovery.
Eswar Prasad, professor of trade policy and economics at Cornell University and a former head of the International Monetary Fund’s China division, told The Wall Street Journal that China’s latest CPI data and other weak economic signals “portend a treacherous period ahead for the Chinese economy.”
“China’s deflation could also impinge on the world economy if it means that China, rather than serving as an engine of global growth, counts on demand from the rest of the world to revive its economy,” he added.
The NBS claimed that the year-on-year drops are due to 2023’s Chinese New Year landing in January of that year as opposed to February this year.
Global pressures
China’s worsening economy and changing trends worldwide put Beijing in a deeper bind as once-strong trade relationships wither.
A Feb. 7 report by Reuters based on data from the German Federal Statistics Office said that based on the current trajectory, the U.S. could overtake the PRC as Germany’s largest trading partner by 2025.
German exports and imports to China totaled around 253 billion euros in 2023, while U.S. trade with Germany came in at 252.3 billion euros, just below the Sino-German figure, according to Berlin’s preliminary data.
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Exports to China were down 9 percent year-on-year to 97 billion euros, with the chemical and auto sectors especially hard-hit. Meanwhile, German imports from the PRC fell by a fifth to just under 156 billion euros.
“At the moment there are no signs of a significant increase in demand for products made in Germany from China,” Volker Treier, head of foreign trade at the German Chamber of Industry and Commerce, told Reuters.
He added that the “strength and attractiveness of the U.S. economy” made it a much better option for German firms to trade with.
On Feb. 14, Reuters reported that German investment in China had similarly fallen, from 170 billion euros in 2022 to just 116 billion in 2023.
The next day, the economies of the United Kingdom and Japan both entered technical recession, with the British GDP falling 0.3 percent in the final three months of 2023 after a 0.1 percent decline in the third quarter; Japan’s GDP shrank by 0.4 percent in the final quarter of 2023, and 3.3 percent in the quarter before that.
SinoInsider noted in its Feb. 19 analysis that “Chinese companies could be pushed by deflation to drastically lower prices as they seek to export their way out of trouble.”
However, dumping goods in international markets at a time when many other countries are struggling with economic troubles of their own could stand to further worsen Beijing’s relations with them.
Meanwhile, “countries falling into technical recession and reduced Chinese trade with countries like Germany portends a growing decline in international demand for Chinese products,” SinoInsider wrote.
