Deflation in China

Introduction: –

Deflation in China refers to a sustained and general decrease in the overall price level of goods and services within the Chinese economy. This economic situation is characterized by falling prices, reduced consumer spending, decreased business investment, and potentially negative impacts on economic growth. Deflation is the opposite of inflation, where prices generally rise over time. Deflation can have various causes, ranging from structural economic factors to monetary policy decisions.

To combat deflation, governments and central banks might implement measures such as reducing interest rates, increasing government spending, or engaging in quantitative easing (injecting money into the economy). China, like other countries, would need to carefully assess the root causes of deflation and design appropriate policies to address them and stimulate economic activity.

Causes for Deflation in China: –

There are number of factors that have contributed to China’s deflation. One of the reason is ongoing confusion in Real estate market. The Real Estate market had a major impact in the growth of China’s economy. Due to recent slowdown in global economy and China government’s crackdown in debt there is a sharp decline in market prices of property which in turn has reduced the Consumer’s spending. China’s exports are also adversely affected due to weak global market conditions which has led to slowdown in production as well as investment and it ultimately gives push to deflation.

Repercussions of Deflation in China: –

China being the second biggest economy in the world has slipped into the curb of deflation owing to the Covid-19 pandemic Lockdowns. Over the past decade, the Global economic growth of more than 40 percent has been sourced by China. Impact of the deflation may cause significant positive as well as negative shift in the economies of the world. Some of the changes it may cause in India are listed below:

Positive Impacts

• Import Cost Reduction – As a result of cheaper products in China, Indian businesses reliant on Chinese imports can enjoy the advantage of lower production cost as well as the lower import cost.
• Consumer Benefits – Increase in purchasing power and improved standard of living for many can be a positive impact on the consumers in India.

Negative Impacts

• Trade Imbalance – the trade deficit between India and China may widen further due to cheaper Chinese goods. Indian exporters could struggle to keep pace with the invasion of cheaper Chinese imports.
• Currency Fluctuations – The relative value of the Indian Rupee against the Chinese Yuan could be influenced by changes in trade dynamics.
• Investment Impact – Slowdown in Chinese economy could impact the global investor sentiment and reduce Foreign Direct Investment (FDI) in India, as investors might be more cautious about emerging markets.
• Export Competitiveness – While Indian consumers may benefit from cheaper imports, Indian exporters might face challenges as their products become relatively more expensive. This could lead in decrease of export and consequently affecting the sectors heavily reliant on foreign demand.

Conclusion: –

Economies are highly interconnected, and changes in one country can have ripple effects on others. The actual impact would depend on a range of factors, including the extent of deflation in China, the responsiveness of Indian businesses and consumers, government policies, global economic conditions, and other geopolitical factors. It may have a positive as well negative impact on other economies. The extended period of deflation may help curb rising prices in other parts of the world or could negatively impact employment, company profits and consumer spending.

(This article represents the views of the authors only and does not intent to give any kind of legal opinion on any matter)

Authors:

Kushal Mehta | Consultant | +919930612247 | kushal.mehta@masd.co.in  

Shripriya Aithal | Consultant | +918779984264 | shripriya.aithal@masd.co.in