Comments: Why does China be threatened by shrinking? What does this mean?

Source: Bloomberg

Author: Jill Elaine Disis

Data from residents' consumer prices (CPI) in July undoubtedly showed that China is now obviously threatened by shrinkage.For the first time since 2020, the consumer price and industrial producers' factory prices have fallen, which has exacerbated people's concerns about China's second largest economy in China.Given that many other regions around the world are facing inflation pressure, the news of China's decline in prices may appear somewhat different.However, there are special factor that leads to these problems in China, and it is deeply ingrained. It may not be easy to solve the problem.

1. Inflation in other countries, why does China shrink?

The United States and other major economies have surged after the epidemic reopening. Earlier this year, some economists expect this situation to occur in China after the anti -epidemic prevention policy.However, it is not.China's consumption expenditure has remained sluggish, and the decline in real estate for a long time has caused confidence to be frustrated. People are unwilling to buy large -scale goods, and then affect the prices of furniture and home appliances.Due to the sluggish price of commodities around the world and the long -term management and control of China's power field, energy prices have been falling.The price war between auto manufacturers has exacerbated the pressure of shrinking, and many companies have also accumulated excessive inventory during the price reduction and cleaning of the epidemic.Tourism expenditure, catering and other service industries have rebounded sharply after the end of the epidemic prevention, and prices in these areas have continued to rise.

2. If everything is cheap, isn't it a good thing for consumers?

This is not the case.At first glance, the cheap price is a good thing for consumers, but this does not necessarily mean that consumers will start spending money.When the prices of various products fall for a long time, people will start to think that prices will continue to fall, and it is best to postpone expensive products such as home appliances.This will further suppress economic activities, and then force enterprises to reduce prices.For consumers, this is usually transformed into revenue reduction or unemployment, which leads to a reduction in expenditure and entering the dangerous pile down state.

3. What is the impact on the enterprise?

Falling prices usually lead to a decline in income and profits, and then enterprises suppress investment and recruitment.The tightening of the currency also pushed the interest rate level of "reality" or called inflationary adjustment in the economy.The rise in corporate loans will reduce their investment capabilities, and then suppress demand, leading to intensified shrinkage.Some economists believe that with people's loan default and banks' impact, "debt -based shrinkage" will cause recession or depression.Taking Japan as an example, the price of prices in the 1990s maintained a state of stagnation for a long time. Now this is still a problem. The government is still dealing with the problem of how to stimulate economic growth in a sustainable manner.The Bank of Japan's negative interest rate policy has been very effective, and this year's monetary policy may usher in new adjustments.

4. How long will this shrinkage last?

5. What can China do?

The People's Bank of China may further cut interest rate cuts or reduction.The problem is that the central bank is facing several factors, such as the devaluation of the RMB and the level of debt that has already been high, especially local government debt.In view of financial pressure, fiscal support (or stimulus) has always been mild, which means that the government is not as inclined to rely on large -scale expenditure measures as in the past, but to turn to targeted strategies.China also encourages local governments to try to stimulate residents' consumption.

6. What about foreign investors?

In view of the fact that enterprises face pressure reduction pressure during the shrinkage period, the most obvious impact may be the profitability of the enterprise.Bonds also have some room for rise, and such assets can relatively better protect investors when the economy is not good.Personal concerns about economic growth and investment will usually promote the deployment of more loose monetary policies, which will make a country's bonds more attractive.However, Ken Cheung, the chief Asian foreign exchange strategist of Ruisui Bank, said that China's sovereign bond yield is too low compared to the major market, and it is difficult to attract foreign traders.

7. What does this mean for the global economy?

There may be some benefits for developed countries, at least in the short term.As Chinese manufacturers reduce prices to excessive digestion, this may affect the United States and Europe and other places, providing them with help when local central banks suppress high inflation.However, there are also some limitations: Europe and the United States have become more trade protectionism in recent years, and tried to limit their dependence on China.Moreover, Chinese -made goods accounted for relatively small proportion of consumer expenditures in developed countries.For example, the CPI basket in the United States is mainly composed of housing, food, energy and medical care, and is not related to imported products from China.Emerging markets may welcome such price declines, but there are also some warnings. Analysts pointed out that these countries may be alert to too many Chinese products that are welcome to form competition, because this will weaken the local industry.

8. Did this happen before?

Yes.In 2009, 2015, and 2020, the Chinese government took strong currency easing and large -scale fiscal stimulus measures for each time.Although this time Beijing promises to accelerate some infrastructure projects and increase support for the real estate market, many economists do not think that there will be a large -scale infrastructure boom like in the past, because China is focusing on promoting economic dependence on new ones.Growth momentum, such as advanced technology.This will make government response measures more similar to the actions during the 1998 shrinkage.Before joining the World Trade Organization (WTO), China carried out asset reorganization on banks with poor performance and reduced the scale of the state -owned field.