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Antony Antoniou – Reform UK Northampton North
Prospective Parliamentary Candidate
(PPC) 2024 General Election

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Unraveling the Complex Puzzle – China’s Looming Threat of Deflation

China, once expected to emerge robustly from the Covid-19 pandemic, is grappling with an unexpectedly weak rebound, leaving analysts baffled and apprehensive. Recent data revealing negative indicators of Chinese inflation have sounded the alarm, raising concerns about the potential slide into deflation. In the midst of this economic uncertainty, President Joe Biden has even labeled China’s predicament a “ticking time bomb”.

**Deflation Fears Grow as Key Indicators Turn Negative**

As economic indicators take a downward plunge, the world watches as China grapples with the threat of deflation. The July consumer prices index slumped by 0.3% compared to the previous year, while the producer prices index plummeted by a staggering 4.4%. This unsettling development marks the first time both indices have slipped into negative territory since November 2020 when the world economy was paralyzed by the pandemic.

**Mixed Signals: Signs of Hope Amidst Decline**

Amidst the prevailing gloom, there are glimmers of hope. The drop in producer prices could potentially mitigate global inflationary pressures. Trivium China, a respected consulting firm, highlights a marginal uptick in consumer prices in July compared to the previous month, suggesting that the decline may be bottoming out. Core inflation, excluding volatile food and energy prices, also saw a slight increase in July. China’s GDP growth of 5.5% in the first half of the year offers a glimpse of optimism, indicating a possible achievement of Beijing’s modest 5% growth target for 2023.

**From Revenge Spending to Cautious Consumption**

The narrative of a roaring comeback post-pandemic is not playing out as expected. An anticipated surge in consumer spending, often termed “revenge spending,” failed to materialize. Despite a substantial increase of 17.8 trillion yuan in household savings during 2022, caution seems to be the prevailing sentiment. The Chinese populace, instead of spending recklessly, appears to be exercising prudence. Although domestic travel during the May Day holiday surged by nearly 20% compared to 2019, the revenue generated barely surpassed pre-pandemic levels.

Adam Posen, President of the Peterson Institute for International Economics, expresses his surprise at the lackluster nature of China’s economic rebound, stating, “It’s quite shocking to see just how weak the rebound is in China.”

**Savings Surge Amidst Lingering Apprehensions**

Intriguingly, despite repeated interest rate cuts by banks, personal deposits skyrocketed to an all-time high of 133.1 trillion yuan in June. The driving force behind this surge seems to be the lingering apprehensions arising from the unconventional zero-Covid policies pursued during the pandemic. This shift toward more liquid assets is often interpreted as a manifestation of fear and a need for self-insurance.

**Property Market Woes: A Significant Factor in China’s Economic Conundrum**

The core of China’s economic challenges lies in its beleaguered real estate sector. Accounting for nearly 30% of GDP, the industry has faced turmoil due to a governmental crackdown on over-leveraging and restricted access to financing for property developers. Coupled with zero-Covid measures, this led to construction halts and potential homeowners being stranded despite significant down payments. The sector’s confidence has been profoundly shaken, as evidenced by a 7.9% decline in real estate investment during the first half of 2023.

**Country Garden’s Plunge Highlights Real Estate Struggles**

Country Garden, China’s largest property developer, is emblematic of the industry’s troubles. Once valued at $50 billion, it is now on the brink of default, its worth having plummeted to $3.3 billion. This echoes the fate of Evergrande, the second-largest developer, which defaulted in 2021, inducing panic and mortgage boycotts. Country Garden’s commitment to deliver nearly 700,000 units in 2023 is overshadowed by JP Morgan’s forecast of an 80% drop in home sales during the latter half of the year.

**Structural and Social Factors Exacerbate Woes**

Structural issues compound China’s economic challenges. The rate of urbanization has slowed, reducing demand for housing in second and third-tier cities. Plummeting marriage and birth rates further dampen the need for larger homes. With youth unemployment reaching an all-time high of 21.3%, many young individuals opt to remain with their parents for extended periods.

**Beijing’s Dilemma: Stimulus Measures and Fiscal Responsibility**

Amid these challenges, the question arises: will Beijing resort to stimulus measures? While past crises prompted the government to encourage local borrowing for infrastructure projects, this approach has been criticized for perpetuating fiscal irresponsibility. China’s current leaders emphasize “high quality growth,” focusing on technological advancement and self-sufficiency over blind pursuit of GDP growth.

**The Road Ahead: Balancing Policy Interventions**

While Beijing has yet to unveil significant fiscal or monetary policy changes, addressing the mounting local government debt is a priority. These authorities, already weighed down by infrastructure overspending and aggravated by zero-Covid measures, teeter on the edge of default. The estimated debt burden of $13 trillion to $23 trillion underscores the complexity of the issue.

Despite differing viewpoints, experts concur on the need for substantial government intervention. As Houze Song, a researcher of the Chinese economy at MacroPolo, highlights, the absence of a significant stimulus could impact third-quarter growth. While a gradual stabilization is anticipated, instilling confidence remains pivotal to avoid prolonged economic stagnation. China’s economic landscape remains intricate, demanding a cautious orchestration of policy measures to navigate the challenging journey ahead.

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