China’s economic challenges are causing deflationary pressures that are a concern on a global scale and are expected to worsen in the coming months, according to economists. The weakening economic fundamentals in Beijing have become evident in recent months with disappointing data in July and the suspension of publication of youth unemployment figures. Credit data for July also showed a decline in borrowing demand, particularly in the real estate sector. China’s consumer price index fell 0.3% year-on-year in July, the first instance of deflation in over two years. This presents a contrasting issue to the inflation experienced in major Western economies. Falling prices in the property sector have contributed to the decline in inflation. Chinese economic weakness and falling prices are expected to have an impact on global markets. China’s manufacturing power means that its economic woes are likely to spill over to other countries. While Western economies have experienced inflation due to supply chain issues, China has been able to mitigate these problems with its domestic manufacturing capabilities. However, domestic demand has faltered in China, leading to excess capacity in manufacturing and deflationary pressures. The government’s attempts to stabilize the economy have not been sufficient, with credit contraction and property market issues hindering growth. China’s central bank has implemented measures to combat the depreciation of its currency, but there is skepticism about whether it is enough to reverse the negative trends. The decline in China’s economy is impacting global sentiment and growth. Imports and exports are also affected, with lower prices of goods being passed on to US consumers. Weak Chinese investment and excess manufacturing capacity are likely to continue to suppress global commodity demand. As a result, deflationary pressures are expected to impact global consumer markets, with increased discounting in the coming months. The government’s fiscal policy responses will determine whether inflationary pressures worsen or if there is a downward spiral. Persistent deflation in China would have implications for developed markets as it would lower the cost of Chinese goods abroad. The uncertainty surrounding China’s recovery is casting a shadow over global markets, particularly in Europe where companies heavily rely on Chinese demand. Stabilization of the Chinese economy in the fourth quarter is anticipated, but the improvement in data is needed before market sentiment turns positive again.
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