China’s topsy-turvy pricing problem

While here in Canada we contend with eye-popping price increases, on the other side of the world, people in China are facing a different pricing problem: Deflation.

What happened: Consumer prices in China fell in July after several months of a near-zero rate of inflation, officially tipping the economy into deflation. That may sound nice (who doesn’t like cheaper stuff?), but it can be crippling for an economy. 

  • When prices fall, people tend to hold back on purchases, anticipating that prices will be lower in the future. Companies respond by cutting production and laying people off, pushing down consumer demand and growth even more.

Why it matters: China is one of the growth engines for the world economy and the largest consumer of most commodities, many of which Canada exports. Economic pain there will reverberate here, too.

Why it’s happening: Most economists agree that China has a demand problem—specifically, there’s not enough of it. 

  • Unlike other large economies, China did not provide people with direct financial support during the pandemic—that’s left consumers less flush than elsewhere in the world.

  • More recently, falling property prices have dragged down growth and caused people to pull back on spending.

Zoom out: Some analysts think China may be experiencing the “Japanification” of its economy, with an ageing population, low growth, and flatlined prices—a sharp reversal from decades of extraordinary economic gains.—TS