The mainland confronts the specter of deflation while many countries in the West continue to fight heightened levels of inflation. It all looks very late 1980s Japan - but there are differences.
It is all starting to make much more sense. Just before the weekend last Friday, as finews.asia commented, the mainland, seemingly out of nowhere, relaxed visa requirements for foreign businessmen while scrapping a highly contentious tariff imposed on Australian barley. And that was just among a raft of other business-friendly measures.
Then on Tuesday came the news of precipitous double-digit drops for both imports and exports, the third consecutive month that both sides of the country’s trade balance declined - something finews.asia also weighed in on.
Now, Wednesday, we have a better inkling of what is really going on. China’s National Bureau of Statistics reported (Chinese only) that consumer prices fell by 0.3 percent year-on-year. At the same time, producer prices were down 4.4 percent from a year earlier.
Detrimental and Corrosive
As many are starting to comment, this new and surprising development, almost the third in as many days, seems to raise the specter of deflation. Lest we forget in the inflationary excitement much of the world seems to be lost in, falling prices can often be more detrimental and corrosive to a national economy, particularly if it comes on the back of asset price bubbles.
But we are not quite there yet. As we indicated Tuesday, export volumes are higher than they were before the pandemic, so much of this may simply be a very natural reverse bounce after China’s re-opening at the end of last year. In the first quarter, for example, much of the conversation was about how the economy was rebounding far faster than expected.
At the same time, no one can confidently sound the all-clear. There is the painful overhang of the country’s real estate crisis, which now even seems to be enveloping former industry stalwart Country Garden (collated Google search), as well as unsettled financial markets. The Hang Seng Index remains over 30 percent off its five-hear high although the Shanghai SSE Composite has fared slightly better. Over the past 52 weeks, the latter remains near its all-time high after dipping about 20 percent from current levels.
Zombie Banks
Superficially, though, a case could be made that all this looks very Japan circa 1989, which led to a lost decade of economic stagnation and price deflation after the asset bubble burst and it suffered a credit crunch and liquidity trap – not to mention an era of zombie banks and companies.
It is not yet clear if that is happening on the mainland - and it won’t be for a while yet. China is not in the same stage of economic development that Japan was back then. Besides the main cities and the south, much of the country remains relatively undeveloped, unlike Japan, which had both one of the highest levels of national GDP and per capita GDP in the world back then.
At $14,000, the world’s second-largest economy remains firmly entrenched in the midfield when it comes to per capita income. Data from the IMF show China remains far below the levels Japan posted in 1989 and significantly less than half of what the $35,000 Japan currently has on the books.
Decades to Unwind
That is something that clearly stands in China’s favor - although there are other things that most decidedly do not. Real estate crises take decades to unroll wherever and whenever they happen. Just look at the fallout from US subprime and the Swiss property crisis of the early 90s, which took one-third («Finanz und Wirtschaft», German only) of the latter country’s banks with it.
Then there is the gargantuan network of sovereign-owned entities kept at close quarters in the vast, centrally-driven economy. There are no reliable figures but statistics (The World Bank) indicate they command a quarter (Lowy Institute) of all economic activity and 40 percent of listed market capitalization. They also are dominant in many key industries, not to mention that all the major banks are state-owned. More likely than not, at least a sizeable few are prime zombie candidates.
Still, there is one factor that is more important than everything else. It is also something Japan never had to confront, at least not to the same extent. Bad geopolitics. Several experts asked by finews.asia believe that, at the end of the day, that may be the most important factor given how it is prompting international investors to be very cautious about investing in China, if at all. In other words, it could be a key factor that tilts the scales against it.
