Once upon a time, children in Europe wondered how Australians managed to walk upside down. China is not at the antipodes, but it gives the impression of walking upside down compared to Europe and the United States. At a time when the US Federal Reserve is choosing to keep interest rates high to contain inflation, which is barely receding, China is facing the opposite question: How to drive prices up?
For the 20th month in a row, production prices fell in May by 1.4% compared with 2023, following a 2.5% drop in April. Consumer prices edged up by 0.3%, according to Beijing. Bloomberg attributed this modest gain largely to higher utility prices (energy, water, transport) and not to household spending. Households are still affected by the real estate crisis and the slowdown in the job market. Economists surveyed by Bloomberg expect inflation in 2024 to be around 0.7%, instead of the government’s official target of 3%.
Price decreases would be a dream come true on this side of the planet, but deflation is just as fatal as inflation, since it encourages people to postpone their purchases and eats into corporate profits and, ultimately, wages, which in turn erodes purchasing power. All that is bad for growth and consumer morale.
Defusing anger
To combat this, the government has two weapons at its disposal. The first is to help companies export their products to make up for weak domestic sales. And the second is to boost consumption through aid programs such as subsidies for the purchase of electric cars.
But export aid hinges on customer acceptability. America no longer wants Chinese products, and Europe has decided to heavily tax the electric cars that are flooding into its ports. To defuse this anger, Premier Li Qiang has embarked on a major tour of his Malaysian and Oceanian neighbors, notably New Zealand and Australia. But the country will also have to admit that reducing the share of the export industry in its economy in favor of services is part of the normal development cycle.
As for stimulating consumers, the first step would be to resolve the real estate crisis, which is ruining Chinese savings, and lower interest rates. China, however, would like to see the Fed finally lower its rates to prevent too wide an interest rate differential from destabilizing its currency. Those two are not done keeping tabs on each other.