(This text was published in Global, Federico Rampini’s newsletter: to receive it, just click here)
According to official data, average inflation in the euro zone is around 6%. In the United States we’re at 5% (although ‘perceived’ inflation is much higher; there’s something unconvincing about the basket of consumer goods used to measure the cost of living). In China? Consumer price inflation may reach 1% by the end of the year. Producer prices are falling.
While interest rates have risen in America and Europe, the cost of money in China has tended to fall. Compared to Western countries, China therefore seems to be a consumer paradise. But is it really like that?
I draw your attention to the ambiguity of the term deflation, which in economics can refer to two similar and related, but not identical, phenomena. Sometimes we use deflation to describe a situation where prices are falling, and then it’s just the opposite of inflation. In other cases, deflation means a fall in prices that is part of a larger phenomenon that is the root cause: a general fall in demand. In this case, behind the fall in prices or their stagnation – which is good for consumers because it preserves or even increases their purchasing power – there is a negative phenomenon, namely the weakness of consumption and other sources of demand (investments, purchases). from abroad or export).
The situation in China lies in a gray area between good and bad news. Certainly the Beijing authorities have one less problem than we do, they don’t need to tighten monetary policy to calm prices. However, they have another problem: this calm on the inflation front shows that the economic recovery is not as strong as expected.
The post-Corona period is not as bright as expected, Chinese consumers are cautious and annual growth may struggle to meet the government’s stated target (which is set at +5% of GDP for 2023). Weaker than expected growth would make it even more difficult to solve social problems such as high youth unemployment, which currently stands at 20% and is particularly severe among young graduates.
If Chinese bank rates are falling while Western ones are rising, it’s because the Chinese government wants its banks to become more lenient in lending to consumers and businesses in order to stimulate household and business spending.
One sector where the government wants to boost consumption is the automotive sector, specifically the electrical sector. But deflation is a spiral that threatens to feed on itself. It is a mechanism that spreads pessimism and causes spending to be postponed. While industrialists in the West debate the nefarious role of additional profits in fueling inflation, China has the opposite problem: its corporate profit margins are shrinking, typically leading to cuts in investment and hiring.
China exports deflation: how it affects us
What impact could China’s deflation have on the rest of the world? China is the world’s largest exporter. When producer prices fall – in May they fell 4.6% for the eighth consecutive month – it means the country is “exporting deflation”. This too is an ambivalent effect. For Western consumers, there’s back a “Chinese rebate,” the price control exercised for decades by the invasion of Chinese-made products (and abruptly interrupted by the pandemic).
However, falling Chinese prices are increasing competition with our producers in the sectors where we compete with Chinese industry. Furthermore, if we look at Chinese deflation in the broadest sense, it means that Chinese demand for our products is subdued.
If deflation then leads to a devaluation of the yuan or renminbi (the Chinese currency), this makes Made in Italy exports more expensive and disadvantages them in the Chinese market. In this case, by exporting deflation, Beijing is helping us in our fight against the cost of living, but at the same time it is holding back our growth; In the worst case, it can help us slide into the dreaded (and so far always postponed) recession.
A note to show how important the Chinese market is for Italy. In 2022 we exported goods worth 16 billion euros to the People’s Republic, that’s a lot, but only a third of what we imported: 57 billion. So we have a large bilateral deficit with Beijing. Furthermore, to give the right sense of proportion, we have to consider that we export a lot more to Europe (418 billion) and North America (72 billion). Sometimes we tend to overestimate the importance of “new” markets, forgetting that “old” dominate by far.