China’s Deflation Woes May Spell Trouble for the West

January 12, 2024

As much of the West is optimistic about inflation normalizing, China continues to sink deeper into the worst deflation in years, raising concerns over how the faltering of the world’s second-largest economy may drag on the rest of the global economy.

China is in the midst of the longest and deepest deflation cycle since the Asian financial crisis of the 1990s. Prices charged by manufacturers have fallen for 15 consecutive months, and with many Chinese consumers worried about the economy and unwilling to spend, consumer prices have fallen for the third straight month. Consumer inflation for all of 2023 amounted to just 0.2%, far below Beijing’s 3% target.

Until recently, many in the West had welcomed deflation in China, as it lowered the cost of imported Chinese goods, helping ease inflationary pressures in the global economy. Now, as inflation worries in the West ease, China’s deflation has become cause for concern.

It signals continuing economic distress in China, which could mean weaker sales for foreign companies that do business there, but more worryingly, it increases the likelihood that more Chinese companies will attempt to offload excess goods elsewhere, undercutting Western companies and further exacerbating trade tensions. Regulators in the European Union have already initiated an investigation into China’s flooding of the European market with cheap electric vehicles, and companies in other industries have raised similar concerns.

The situation adds urgency for Chinese officials to revive growth and stop prices from falling. One major concern is that the country could find itself in the midst of a debt-deflation cycle like Japan did in the 1990s. In such a scenario, falling prices prompt companies to cut wages, which in turn saps domestic consumer spending, creating a vicious cycle where demand and prices continue to push each other lower.

China ended 2023 with exports falling 4.6% from a year earlier, declining for the first time in 7 years.

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