China’s decline in growth raises global anxiety - GulfToday

China’s decline in growth raises global anxiety

People walk past the headquarters of the People's Bank of China, the central bank, in Beijing, China. File/Reuters

People walk past the headquarters of the People's Bank of China, the central bank, in Beijing, China. File/Reuters

Decline in consumer prices and in producer prices for July has put China on the deflation track, and it has raised fears among Western market watchers that China, the second largest economy, could be entering a long-term deflationary period as had Japan in the last two decades.

There is the undeniable fact that China’s post-Covid recovery has not been good enough. Liu Guoqiang, deputy governor of China’s central bank, has ruled out deflation, but he has admitted that it would take China a longer time to recover from the disruption in the economy caused by Covid. The consumer price index for July year-on-year has declined 0.3 per cent, according to the National Bureau of Statistics (NBS) on Wednesday. The producer price index (PPI) had declined 4.4 per cent.

Surprisingly, it is the fall in pork prices from 7.2 per cent to 26 per cent, based on ample supplies and weak consumption, that has led to the fall in the consumer price index. But it is not deflation all the way. The consumer price index has actually risen by 0.2 per cent, and core inflation, excluding food and fuel prices, has risen 0.8 per cent year-on-year in June compared to 0.4 per cent last June. So, the expectation is that the deflationary trend will not last more than six months to a year, according to Xia Chun, chief economist at Yin tech investment holdings, in Hong Kong.

There is the general expectation that the Chinese government would announce stimulus measures to revive the economy, but there has not been any announcement of a big stimulus, though there have been some pertaining to cars and appliances, and some of the cities have property curbs. Tommy Wu, chief economist at Commerzbank says, “Markets and businesses should get used to the ‘new normal’ in which the Chinese government will avoid rolling out big stimulus.”

The big fear is that if the Chinese economy does not recover its momentum, then the global economy would be affected. China has been the global supply chain hub, and it has also absorbed enormous amounts of Foreign Direct Investment (FDI) flows. China plays a crucial role in keeping the funds flow in a vibrant state, and China is also a huge marker for consumer goods, including electronics.

A slowdown in the Chinese economy would be a dampener on the global economy. Though the US and the European Union (EU) countries adopt a tough stance over Chinese government’s policies, they fear that the fall in Chinese economy growth would be bad news. That is why, the US has been maintaining a high level communication channel open with China. US Secretary of State Anthony Blinken and US Secretary of Treasury Janet Yellen made high profile visits to Beijing and Chinese Foreign Minister Wang Yi has been invited to Washington. The US is aware that the Chinese economy’s health is an important factor for the global economy.

When the Japanese economy slipped into deflation sometime in the 1990s and for a quarter century was not able to climb out of its domestic economic stagnation, only the Japanese, and not the world, have felt the pains because Japan has been a relatively small sized economy among the G7 advanced industrial democracies. It did not have the bigger global footprint that the Chinese had developed a bigger footprint in the global economy.

After the Covid disruption, there is a feeling among many countries that the dependence on China for goods has to be reduced, and there should be other reliable sources. That is why, Western countries are looking for alternatives to China in south-east Asian countries like The Philippines and Vietnam, and to countries like India. But it has been recognised that China will have to remain the frame and it cannot be dispensed with.

Related articles