Chinese Economy Slips into Deflation

Chinese Economy Slips into Deflation

The world's second-largest economy is in the midst of a slowdown and has slipped into deflation with prices falling year on year as slowing domestic spending weighs on the country’s post-Covid economic recovery.

Retail sales and industrial production in July missed economists’ expectations, and investment in real estate is plunging. As a result, an index of Chinese stocks traded in Hong Kong has fallen more than 9 % this month. The benchmark for stocks that trade in Hong Kong, the Hang Seng Index, is down a similar amount. The property sector is among the ones dragging the indexes down, with the beleaguered Chinese real estate firm Country Garden having lost about half its value this month.

A stock index called the CSI 300, which tracks the most prominent companies listed in Shanghai and Shenzhen, has dropped about 5 %.

“The Chinese economy is faced with an imminent downward spiral with the worst yet to come,” analysts at the investment bank Nomura wrote in a report to New York Times last Tuesday. “Beijing should play the role of lender of last resort to support some major developers and financial institutions in trouble, and should play the role of spender of last resort to boost aggregate demand.”

Indeed, the People’s Bank of China, the nation’s central bank, has cut key interest rates to new lows. But critics say that the moves have not been bold enough. Last week brought more distressing data: Home prices had fallen in 49 of 70 major cities in the country.

Analysts at Barclays predicted that the Bank of China would soon lower the amount of reserves banks need to hold, in a bid to stimulate the economy. Barclays cut its forecast for economic growth in China this year from 4.9 % to 4.5 %. The analysts said next year would bring even slower growth, with output expanding at 4 %.

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