And there it is.
Just days after our colleagues at mainFT reported that China has banned the mention of deflation — “Deflation does not and will not exist in China,” according to a stats bureau spokesperson — China is, well:
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JPMorgan points out that headline CPI, PPI and the GDP deflator have all now turned negative in China, and warn that the danger of deflation is going to hang around for the rest of the year:
Deflation risk in China reflects unique domestic problems, such as lagging and weaker recovery in domestic demand, high unemployment and lack of wage inflation pressure, weak rental cost, and unexpected large drops in auto prices and pork prices.
This is going to be more fuel for those that argue that China is now facing a Japan-style “balance sheet recession”, basically an extended period of deflationary deleveraging.
Here’s Nomura’s Richard Koo — the originator of that phrase — talking on Bloomberg’s Odd Lots podcast, with Alphaville’s emphasis below:
. . . [A] balance-sheet recession is triggered by this whole notion that people feel uncomfortable with their balance sheets, suppose their debt is too large relative to their assets. And that typically happens after bursting of a bubble. If the bubble is financed with debt and asset prices collapse, but the liabilities remain, people realize that their balance sheets are underwater, and if it’s the balance sheet underwater you have to fix it.
Well, how do you fix it? You pay down debt. Well, l that’s the right thing to do at the individual level. But when everybody does this all at the same time, we get into a fallacy of composition problems, in that in a national economy, if someone is saving money or paying down debt, you need someone else to borrow and spend the money to keep the economy going.
And in the usual economy you get too few borrowers, you bring interest rates down. Too many borrowers, you push interest rates higher, and then that’s how you keep the economies going. But when the big bubble bursts and asset prices collapse, everyone will be paying down debt. No one will be borrowing money even at zero interest rates because if your balance is underwater, you’re not going to borrow money, even if interest rates come down to zero. And that’s the prospect that Chinese are worried about.
And China got this huge bubble, especially in residential real estate. And the amount of price increase that China observed on the residential real estate is almost the same as what happened to Japan 30 years ago in Tokyo and Osaka.
And so when the real estate bubble started collapsing last year, all these Chinese economists began to worry about a Japan-like situation where so many people are paying down debt all at the same time and [the] economy could then fall into a deflationary spiral.
I think that is actually already happening in China. A lot of people are saying, very few people are borrowing, so many people are paying down debt, even with these low interest rates. And that’s a very bad sign macroeconomically. Individually they might be doing the right things, but collectively, they may be killing the economy.
But as Koo points out, there are some big differences between Japan and China, such as the fact that Beijing is well aware of both its economic challenges and how pure orthodox monetary policy is a poor tool to tackle balance sheet recessions.
Most of all, it still has space for fiscal stimulus, even if the impact of it is diminishing after repeated rounds to soften the ongoing, secular economic slowdown.
And anyway, as JPMorgan points out, a bit of Chinese deflation could be good new for the rest of the world, by helping further quell price pressures elsewhere:
. . . The disinflation pressure is in part related to the decline in global commodity prices, especially for China’s PPI and import prices (China’s import prices fell 13.3%oya in USD term in June). But the interesting development in recent months is that China’s disinflation process has started to pass through to lower export prices.
For instance, China’s exports fell 12.4%oya in June (in USD term), but the breakdown analysis shows that the price effect dominated, in that export prices fell 10.6%oya and volume only fell 1.8%oya. China’s export prices growth started to turn negative in March and the export prices decline has accelerated in recent months. This could have facilitated the disinflation process in major trading partners. For instance, US import prices from China fell 2.2% in 1H. Similarly, the euro area and Japan observed the steepest declines in their import prices from China (-15% and -17%, respectively, on a 3m%3m saar basis through May). Our recent study suggests a China spillover to global (ex China) core goods inflation of around -70bp over 2H23, all else equal.
Source: Economy - ft.com
