What does falling consumption mean for the Chinese economy?

While central banks in developed countries struggle to combat rising inflation, China faces the opposite problem: The world’s second-largest economy is at risk of slipping into deflation.

For China, consumer prices last week were flat from a year ago in June, while producer prices fell at their fastest pace since 2016.

This compares with the US inflation rate, which fell to 3 percent (compared to 4 percent in May) from 9.1 percent in June last year (the highest in four decades at the time).

According to an analytical report published by the British “Financial Times” newspaper, after the war in Ukraine, developed economies were hit hard by a sharp rise in energy and food prices, while energy price controls in China protected them from the worst. Up and Down.

But the country is now at risk of contraction due to weak consumer demand and private investment as the economy emerges from strict restrictions against the Covid-19 virus.

China’s economy.. data defies expectations and confuses markets

The British newspaper report analyzes the policies that China has been following since 2020 and the details of the policies that have led to the current situation. and fiscal policy, as follows:

• In 2020, the government issued 1 trillion yuan ($140 billion) in bonds, ran a fiscal deficit of 3.6 percent of GDP and cut interest rates by 30 basis points.
• In 2022, it channeled another 1.4 trillion yuan in “quasi-fiscal financing” through state-owned banks, according to Citi Research. Local government bond issuances were also allowed to increase, and interest rates were cut by another 20 basis points.
• Beijing’s fiscal stimulus is focused on infrastructure and corporate spending, tax cuts, cuts in mandatory social security payments on wages and other measures aimed at stemming job losses.

In contrast, the United States has introduced a very large fiscal and monetary stimulus program, reducing the reward in direct payments and unemployment benefits to American consumers. The US and other Western countries also suffered from supply disruptions as people left the workforce and supply chains were disrupted.

In China, supply chain problems were minimal. Chinese citizens are confined to their homes for long periods of time and their businesses are closed, leading to increased unemployment and severe damage to family budgets. The real estate slump also affected commodity prices, leading to lower producer price inflation.

Chinese policies during and after the pandemic

At the same time, many local governments have emerged from debt contagion. The private sector had overcapacity, weak consumer demand and a reluctance to invest.

Dr. Samar Adel, an international economic analyst, comments in an exclusive report to the “Sky News Arabia Economy” website: “The policies adopted by China during the Corona pandemic and the strict “Zero Covid” restrictions since then are negative. The impact on the dynamics of economic activity, after the Ukraine war affected supply chains and trade, taxed the Chinese economy at a time when Beijing relied mainly on a high export base to drive manufacturing and economic activity. These factors are combined.

He added to these factors the continuing effects of US-Chinese escalation (the trade war between Washington and Beijing), despite the positive messages sent by US officials, the latest of which was US Treasury Secretary Janet Yellen, during her visit. China, President Joe Biden is shaking up more restrictions (. .) and this is reflected in many areas, including the problems the Chinese economy is facing in the technology sector against the backdrop of pressures emanating from the US and the West. and affecting economic activity.

According to the aforementioned data and policies, the international economist points to a slowdown in consumption in China based on rising consumer concerns and reduced spending, in light of the pressures facing Beijing in the past three years from 2020. , which puts pressure on the economy and threatens financial contraction.

A risk for Chinese policymakers is if the deflationary trend stabilizes in consumer and business expectations. As a result, companies will curb investment as profits dry up, while consumers will spend less as they worry about their job security and further declines in property prices, according to a British newspaper report.

Crisis in real estate sector

The same report notes that there is evidence that the real estate sector – after stabilizing at the beginning of the year – is again on a downward path (..).

In this context, Adel pointed out in an interview with Sky News Arabia that the real estate sector crisis that Beijing faced a few years ago and real estate assets, although one of the pillars of the Chinese economy, is still a shadow. On the scene, because many companies exited with huge debts when the crisis hit, and developers were hit hard, it caused a shock to the Chinese economy, the effects of which are still there.

Returning to the Financial Times report, analysts cited their estimates regarding:

• Possible further weakness in consumer prices.
• Inflation is expected to pick up slightly in the coming months due to lower base effect (year-on-year inflation).
• “Further easing of housing and infrastructure-related policy will be critical to stabilizing aggregate demand,” Morgan Stanley analysts wrote in a research note.

Economic data

The latest official data showed China’s economy grew at a slower pace in the second quarter, although the overall pace fell quickly due to weak demand at home and abroad, and the annual figure was encouraging due to underlying stimulus.

According to data released by the National Bureau of Statistics, China’s gross domestic product grew just 0.8 percent in the April-June period, compared with a 0.5 percent increase from the previous quarter, compared with analysts’ expectations in a Reuters poll. This compares to the 2.2 percent growth recorded in the first quarter of this year.

• GDP in the second quarter was 6.3 percent year-on-year (expectations were 7.3 percent, 4.5 percent in the first quarter).
• GDP for the second quarter was 0.8% qoq (2.2% in the first quarter, expectations were 0.5%).
• Industrial production for June 4.4% y/y (expected 2.6%, May 2.7%).
• Retail sales for June 3.1% yoy (expectations 3.2%, May 12.7%).
• Investment in fixed assets rose 3.8% y-o-y in January-June (expectations 3.5%, 4% January-May).
• Real estate investment from January to June – 7.9 percent per annum (January to May -7.2 percent).
• Real estate sales on a Jan-Jun landscape basis -5.3% yoy (Jan-May -0.9%).

Broad challenges

For his part, Professor of Economics, Advisor to the World Bank, Dr. Mahmoud Anbar points to the uncertainty that dominates the markets, which leads to restrictions on investments and spending (in the case of China it is slow consumption and unwillingness to invest).

Although China has not entered a state classified as an economic recession, it is more likely to record a two-quarter recession, Anbar argues in exclusive reports to “Sky News Arabia Economy”, the global economy, in light of the consequences of the war in Ukraine , according to the latest reports of the United Nations Conference, various countries around the world. A rare event of inflationary stagnation is threatened, triggering a general state of uncertainty affecting economies. Trade and Development (UNCTAD), which indicates that global foreign direct investment will decline by 12 percent to $1.3 trillion in 2022.

He mentions a group of factors specifically related to China that are putting broader pressure on the Chinese economy in light of the uncertainty in the global economy, chief among them related to the trade crisis China is facing with the United States. , as well as factors related to the Chinese economy and the policies pursued, indicate that Beijing relies on exports for a large part of its domestic production and that it has been hit hard by the recession. A slowdown in global trade poses broader challenges for the Chinese economy.