America pushes China economy further into deflation

 

U.S. versus China: China’s economy has fallen into deflation as the consumer price index fell 0.3 percent year on year in July, its first decline since early 2021. Consumer spending in China was expected to rebound after authorities lifted pandemic restrictions at the end of last year, but the reverse has occurred. 

Meanwhile, the Biden administration is expected to unveil an executive order in the coming days that would restrict U.S. investment in China. But the plan has reportedly been softened, applying only to Chinese companies that get at least half of their revenue from cutting-edge sectors such as quantum computing and AI. 

 A perhaps obvious but underexamined aspect of the economic rivalry between Washington and Beijing is this simple fact: China’s unprecedented rise over the past two decades was, well, unprecedented. It was never going to continue at the rate that it has.

As a result, the Chinese economy now faces a number of challenges, not least being the need to boost domestic consumption in order to move away from the export-driven growth model that has fueled its expansion to date. But it must do so as the U.S. attempts to hamper its further rise.

For its part, Washington is seeking to counter China as an economic and strategic rival, while avoiding a fixed pathway that ends in direct confrontation with Beijing. That would be economically disastrous, considering how interlinked their economies still are. As importantly, however, Washington must avoid being perceived as offering Beijing no alternative to conflict, as that would alienate the allies and partners whose support the U.S. will need to effectively compete with China.

As a result of those dynamics, the Biden administration’s reported intention to limit the scope of its investment ban in high-tech Chinese industries makes perfect sense: a move calibrated to counter China, but not too much.