China’s Exported Deflation Creates Ripples in the Global Economy
China’s economy has been facing deflationary pressure, a rare phenomenon in today’s world economy. As the country experiences declining consumer prices, flat import growth, and sluggish domestic demand, it is not only an outlier but also causing disinflationary pressure and trade tensions in advanced countries. Experts suggest that China’s export prices falling sharply have added to deflationary forces in other nations, leading to geopolitical tensions.
The impact of China’s deflation on the global economy has been relatively small so far, accounting for only a fraction of headline consumer price index inflation. However, even gradual further falls in China’s export prices could exacerbate the situation. Competitors allege unfair pricing by Chinese exporters who ship products and services overseas at cut-throat costs to offset the domestic slowdown.
One of the main reasons behind China’s deflation is industrial overcapacity, which has led to a decline in product and service prices. Manufacturers heavily invested in ramping up production during the pandemic-induced demand surge, but when demand normalized, they were left with excess capacity to export at heavily discounted prices. Falling property and real estate values, rising outflows of foreign investment, excessive debt, declines in population, and poor consumer demand are other problems plaguing China’s economy.
The consequences of deflation are evident in falling consumer prices and producer prices. Consumer prices experienced their fastest rate of decline in over 14 years in January, while producer prices also fell. This has put pressure on officials to boost the confidence-shattered Chinese economy vulnerable to deflation. Household incomes, corporate earnings, investor returns, and government taxes have all been negatively affected by deflation.
China’s strategy to combat its flagging economy is to sell off its surplus manufactured products at reduced rates. This has impacted markets globally, with Chinese companies gaining market share and undercutting retailers in other countries. For example, companies like TEMU and Shein have gained market share in the U.S. by offering products at lower prices. The impact of China’s exported deflation has reduced with the economic decoupling between the U.S. and China, but it could drastically change if Chinese electric vehicle makers start selling their vehicles in the U.S.
China’s export prices have been falling, leading to a decline in the overall price of exports from the country. Falling import prices in developed markets have mirrored this trend. However, it is believed that China’s exports are underreported in official statistics since many imports, especially to the U.S., are re-routed via other nations. The competition from Chinese manufacturers has put pressure on middle-market companies globally, leading to margin pressure and sharp price drops for some inputs.
Despite the short-term benefits of exporting deflation, there are risks involved. Excessive discounting by Chinese exporters to utilize surplus capacity could squeeze profit margins and equity returns for manufacturers. Moreover, if more Chinese companies are compelled to dump cheap products on global export markets, it could stoke anti-China sentiment during the U.S. election campaign.
In order to address domestic deflation, Beijing needs to boost consumer confidence and increase consumer spending across all income levels. Policy stimuli are required to boost domestic consumption and investment demands. China has ample industrial capacity to support its growth, but realizing its growth potential will require strategic measures.
China’s exported deflation has had a remarkable impact on the global economy. While the direct impact has been relatively small, the gradual decline in China’s export prices and the resulting disinflationary forces have added to geopolitical tensions. As China grapples with its own economic challenges, it is crucial for policymakers to implement measures that stimulate domestic demand and increase consumer confidence. Only by addressing these issues can China contribute positively to global economic stability in the long run.
