What You Need to Know:
China has been struggling with barely rising prices for the last few months. Earlier this week, consumer prices began falling- a dangerous sign for a heavily indebted country. The Chinese government has claimed that this new development poses no threat to their economy and has urged internal economist to avoid the topic altogether.
The market for Chinese goods did not fare well over summer, with some economists measuring that consumer goods in foreign markers were down by .3% across the world. Although many factors go into global prices, the Chinese market has been hit hardest by countries looking for alternate consumer markets due to Chinese behavior in the Pacific. The drops in demand have forced factories to cut prices, causing a 4.4% decrease in producer prices, which is a sharp decrease compared to years of growth.
Why it Matters:
China’s economic foundation comes from real estate and consumer exports. Real-estate assets make-up 3/5’s of average household assets in China. The market has experienced a 14% drop since its peak in August. To curb this type of deflation, the general response is to pump the economy with money. However, citizens and companies that are not state-run have shown very little interest in borrowing any money, with the exception of state-run companies which are under orders to continue to borrow money and invest in projects regardless of the return.
Foreign analysts think that China is not doing enough to support its failing economy and it may be fatal. Chinese birth rates have plummeted and those who are old enough to start families cannot afford the household items, and those that can, likely already have a family. The state had spent years restricting citizens’ investments, only allowing money to be put into certain projects that are now no longer profitable.
The global economy is partially to blame, but many believe that it is the “anti-pandemic” measures put in place by Xi Jinping that have caused this issue. Severe restrictions and civil unrest were widespread in the country. Even after most of the restrictions were lifted, the Chinese economy struggled to recover and has seen very little growth since.
What’s Next:
If the Chinese economy continues to weaken, Xi Jinping will find himself in a precarious situation. To prop up the economy, Chinese businesses are resorting to borrowing funds and investing them in projects with limited returns, displaying a somewhat half-hearted effort. The declining affordability of starting families among Chinese youth is causing a sharp drop in the birth rate, posing a significant threat to Xi’s ambitious expansion strategies.
While there remain numerous uncertainties regarding the overall Chinese economic landscape, additional inquiries will surface concerning its potential repercussions on the global economy. Although definitive answers are elusive, a consensus among economists suggests that technology prices might surge, simultaneously dampening demand for U.S. goods. These dynamics could collectively trigger a global economic downturn.
Interestingly, a peculiar parallel emerges where both middle and lower-class American citizens and their Chinese counterparts could experience comparable hardships. Despite diminished global demand for Chinese goods, American consumers continue to purchase Chinese products at an unprecedented pace.
In terms of strategic policies, economists hold differing opinions on whether Beijing will intensify its efforts or adopt a more relaxed approach. Some contend that China might perceive an opportunity to exploit a weakened U.S. economy and a preoccupied Europe to address the Taiwan issue. Conversely, others argue that China would avoid jeopardizing its own economy by making an unfavorable trade-off between military expenditures and economic stability.
Looking Forward:
In the face of China’s ongoing economic challenges, the path forward remains uncertain and critical decisions lie ahead. The recent decline in real estate assets and consumer exports has triggered alarm bells, prompting concerns about the nation’s economic foundation. While traditional responses would involve injecting the economy with funds, the reluctance of non-state entities to borrow coupled with the dwindling birth rates has created a complex conundrum. Xi Jinping, facing a pivotal moment, must navigate this delicate balance between economic revitalization and demographic challenges.
The repercussions of China’s economic struggles are not confined within its borders; they have global implications. As the Chinese economy wavers, a ripple effect is anticipated to cascade through technology markets, potentially reshaping demand for U.S. goods. The entwined destinies of American and Chinese consumers underscore the intricate dance of global trade dynamics. Looking forward, Beijing’s strategic choices will reverberate across continents. In this intricate interplay of economics and geopolitics, the choices made by China’s leaders will not only shape their own nation’s destiny but will also echo across the world stage, sculpting the trajectory of the global economy.
