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China's Battle with Deflation: A Long Road Ahead

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China's Battle with Deflation: A Long Road Ahead

China continues to grapple with deflationary pressures, highlighting the delicate state of its economic recovery as 2023 nears its end. Economists predict that data to be released soon will show a return to deflation in Chinese consumer prices in October, with producer prices likely declining for the 13th consecutive month. The persistent weakness in consumer costs this year, including a slip into deflation in July, raises concerns about the strength of China's economic rebound. Experts suggest that China may face an extended struggle against falling prices in the coming years as it transitions from an overextended, credit-fueled growth model. Weak inflation figures add further uncertainty to the nation's growth outlook, following unexpected contractions in factory activity and slowing growth in the services sector in October. Larry Hu, head of China economics at Macquarie Group Ltd., notes that China's consumption demand remains weak, and the nation's widest measure of prices, the GDP deflator, is expected to be negative in the final quarter of the year. This deflationary trend aligns with Bloomberg estimates based on official data, which indicate that the GDP deflator has already declined for two consecutive quarters, a first since 2015. Additional reports due in the coming days, such as export figures and credit data, may provide further insights into China's economic recovery trajectory. Expectations are growing for the central bank to provide more liquidity support through a cut in the reserve requirement ratio. Analysts predict that the central bank may implement this measure before its monthly policy loan operations in mid-November, as a surge in government bond issuance puts pressure on interbank liquidity. In conclusion, China's ongoing battle with deflation raises concerns about the strength and sustainability of its economic recovery. The potential prolonged fight against falling prices poses challenges for policymakers and businesses alike. Monitoring inflation figures and liquidity support measures will be crucial in assessing the trajectory of China's economic growth and stability.

Hot Take: China's Deflation Battle and Its Impact on New Businesses

China's ongoing struggle with deflation could have far-reaching implications for new businesses, both within the country and globally. As the world's second-largest economy, China's economic health significantly influences global markets. The predicted return to deflation in consumer prices, coupled with a decline in producer prices, could signal a challenging business environment for startups and new ventures.

The Challenge of Deflation

Deflation, characterized by falling prices, can lead to reduced consumer spending as people anticipate further price drops. This can result in decreased revenue for businesses, particularly those in the retail and consumer goods sectors. Moreover, deflation can exacerbate the burden of debt, a common challenge for new businesses.

Uncertain Growth Outlook

The uncertainty surrounding China's growth outlook, exacerbated by weak inflation figures and slowing growth in key sectors, adds another layer of complexity for new businesses. This uncertainty can make it difficult for businesses to plan for the future, secure financing, and make informed decisions about expansion or investment.
In conclusion, China's deflation battle presents significant challenges for new businesses. Navigating this economic landscape will require careful monitoring of inflation figures and understanding the broader economic trends. Despite these challenges, businesses that can adapt to these conditions may find unique opportunities to thrive.
Story First Published at: https://financialpost.com/pmn/business-pmn/chinas-fight-against-deflation-may-be-far-from-over
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