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In China, Deflation Worries Grow

As most of the world grapples with inflation, China is facing deflation that could push it into “an economic trap,” according to The Wall Street Journal (subscription).

What’s going on: “Prices charged by Chinese factories that make products ranging from steel to cement to chemicals have been falling for months. Consumer prices, meanwhile, have gone flat, with prices for certain goods—including sugar, eggs, clothes and household appliances—now falling on a month-over-month basis amid weak demand.”

  • China’s economy is growing, but slowly, and the government recently announced a series of stimulus programs to help.

Parallels with Japan: While most economists see China avoiding a prolonged recession, some “see alarming parallels between China’s current predicament and the experience of Japan, which struggled for years with deflation and stagnant growth” in the 1990s, following collapses in stock market and real estate value.

  • If Japan’s fate were to befall China, the latter would face another hurdle: the usual methods for combating these problems would be either unpopular or toothless “due to the country’s heavy debt load.”

​​​​​​​ A mixed bag: A long period of lower prices in China could help bring down inflation elsewhere in the global economy, including the U.S.

  • But … “[a] deflationary spell in China would also likely mean weaker Chinese demand for food, energy and raw materials, which big chunks of the world rely on for export earnings.”

Effects of uncertainty: And the longer that prices fall and stay down, the more entrenched deflation becomes—making debts “harder to bear and profits and incomes fall. Companies shed workers to fatten shrinking margins.”

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