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The coming depression blog | May 28, 2017

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Chinese Economy – Deflation Fears

Chinese Economy – Deflation Fears

After decades of strong economic progress, China is showing some signs of economic trouble that have got both Chinese and international economic analysts keep a close watch on this economy. Today China is one of the largest economies in the world and what happens in China impacts the entire world’s economy. One of the major concerns of the Chinese economy is the slowdown in growth. The other major concern is that many analysts believe looking at hard data that Chinese economy is on the verge of deflation. High inflation is bad for any economy, but if not tackled effectively deflation can sometimes be worst for the economy. The following are some of the details regarding the fear of economic deflation in China:

Deflation Fears in Chinese Economy

•    Producer Prices in China have been on a decline for the past three years. Moreover consumer price inflation is at its lowest level since 2010 which is a sign that prices are not rising in China.
•    Chinese whole sale goods prices are falling hard and though this month the consumer price index rose slightly, the Chinese economy is still very vulnerable to deflation. The consumer price index did not rise due to long term reform measures but the enthusiasm among consumers to buy goods like fruits and vegetables during the Lunar New Year festivities in February.
•    Chinese producer price index – PPI has declined and fallen by 4.8 percent which is lowest on record since October 2009.
•    Generally to increase liquidity in the market and increase inflation governments cut interest rates on lending. In the last few months the central bank in China has cut interest rates twice, but more needs to be done to avoid deflation in the Chinese economy.
•    Domestic demand has been declining over the last few years in China. There has been a chronic over capacity in Chinese factories and the property market in China has declined in the last few years. Also the growth forecast predicted this year for China has been revised from the earlier 7.5% to 7% and IMF estimates a further decline in growth forecast to 6.8%.

Deflation can have far reaching negative impacts on an economy that is known as the world’s factory. Deflation means prices of commodities fall. This makes debt more expensive in real terms and there is a fear of the economy contracting further. Consumers anticipate that prices will fall further and put off purchases, weakening consumer demand further. Investment in a deflationary economy is risky and so overall progress is hugely impacted by deflation in the economy.

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