China entering deflation

 

China: The domestic economy in China “teetered on the brink of deflation” last month, leading many analysts to predict that China’s central bank will reduce interest rates again, which Beijing will have to supplement with stimulus policies. (Financial Times)

 

Our Take: China’s inexorable rise has taken place in spite of—and at times even because of—structural imbalances that have been cooked into its economic system. These include massive indebtedness, particularly of local governments, which was used to withstand the pressures of the 2008 global financial crisis.

 

With China seeking to shift its economy toward domestic-driven consumption, and in the aftermath of the COVID-19 global pandemic, the resulting slide in growth was to be expected. But it nonetheless represents a significant challenge that China will be hard-pressed to respond to.

 

Essentially, China is caught in a dilemma: It needs to pump stimulus into the economy but wants to reduce the debt needed to do so.