Surplus Global Goods Drive China into Deflationary Waters

SUMMARY:

Deflation Risk in China: China is experiencing a deflationary trend in 2023, which stands in contrast to global inflationary pressures, with implications for the world economy.

Global Impact of China's Deflation: The deflation in China is positively impacting global disinflation efforts in the short term. Lower export prices from China are leading to reduced import costs for countries, such as the United States.

Unique Scenario and Excess Supply: China faced a unique scenario where its lockdown coincided with a surge in global goods demand. As China reopened in 2023, the rest of the world was slowing down, resulting in excess supply. This excess supply is pushing China into deflation.

Plummeting Export Prices: Export prices from China have significantly declined, with an 18% annual rate drop between May and July. This reduction spans various goods, from processed raw materials to lower-end consumer products, impacting major trading partners.

Currency Impact and Future Outlook: The depreciation of the Chinese Yuan is worsening China's disinflationary impact on global import prices, especially as most of China's goods trade is conducted in US Dollars. The deflationary trend is expected to persist through the end of the year, prompting a need for a substantial policy response from China to address the imbalance between domestic supply and demand conditions.