China’s Deflation Crisis: Prices Plummet, Leading to Economic Struggles
On January 8th, a Forbes column spotlighted that China is grappling with deflationary waves reminiscent of the 1997-1998 Asian financial crisis. In Hunan, the prices of meat and vegetables have dropped so low that they’re now lower than the temperature. For example, pork leg meat costs less than 9 Yuan (approximately $1.20) per 0.5 kg, meat with bones is under 10 Yuan, lamb is priced at 26 Yuan (around $3.50), and cilantro is 1.8 Yuan per jin (one Jin consists 450 gm).
As deflation sets in and consumption declines, the prices of basic consumer goods have plummeted. Beef, which was once a luxury for ordinary people, has nearly fallen to the price of pork. Since the beginning of the year, beef prices have consistently dropped for 12 months, with wholesale beef prices plunging by 24% in just six months, hitting a five-year low. Fruit prices have also taken a nosedive; cherries that once sold for over 100 Yuan (approximately $13.60) per 0.5 kg are now barely over 10 Yuan.
A regional Maotai distributor in Shaoyang, Hunan, revealed that he used to sell Maotai 1935 for 1,250 Yuan (around $170) per bottle, but now it’s down to 700 Yuan, with the entire Maotai series experiencing price drops. “We have a lot of inventory and are eager to sell it off. There’s no profit left in selling Maotai 1935,” he said.
Another sector feeling the impact of deflation is airfare. In late December, several Chinese netizens posted online about snagging tickets on a travel platform for a Hainan Airlines flight from Chengdu to Beijing on January 4th for just 3 Yuan plus 70 Yuan in taxes and fuel surcharges, totaling only 73 Yuan (about $10 USD).
The dramatic price drops aren’t confined to airfare; the housing market is also seeing significant discounts, with some properties being sold at up to 70% off. Earlier this year, the Wall Street Journal reported that a key advisory body in China had prepared a report warning the Chinese leadership that without urgent measures to boost the economy, China risked falling into a deflationary spiral akin to the Great Depression in the United States from 1929 to 1933.
According to the report, Xi Jinping asked his advisers about the characteristics of deflation. After learning that it involves falling prices, he allegedly responded, “What’s wrong with deflation? Won’t people be happier if goods become cheaper?” This comment drew comparisons to Emperor Hui of Jin, who infamously responded to reports of famine by asking, “Why don’t they eat meat instead?”
The historical ridicule of Emperor Hui’s ignorance has persisted for over a thousand years, and if the rumored comment by Xi Jinping is true, it could similarly go down in history as a glaring misunderstanding of the grave consequences of deflation. The report described two types of deflation: structural deflation and debt-driven deflation. Experts warned Xi that the current issue is debt-driven deflation, similar to what occurred during the Great Depression.
This deflation spiral tightens liquidity at every turn, as production, distribution, and consumption cycles shrink further, resembling a spring that compresses more with each rotation, ultimately plunging society into economic stagnation. The root cause of this deflationary phenomenon is excessive borrowing by individuals and entities that shouldn’t have had access to such loans. When these borrowers fail to repay their debts, they are forced to sell off assets either at high prices to extract liquidity or at deep discounts due to falling asset values. Both scenarios lead to slower economic circulation.
When companies face declining profits due to asset devaluation, they reduce production and begin laying off workers, triggering competition for survival. Banks, suffering from their own losses and declining confidence in borrowers’ repayment abilities, have tightened credit. Even high-quality businesses find it challenging to secure loans, and existing loans are being called in or not renewed. This has led to many companies going bankrupt, further slowing down economic circulation. Each cycle from production to consumption shrinks, with spending on both sides decreasing. Prices may be falling, but people’s wallets are shrinking even faster, and purchasing power is declining at an accelerated rate.
Today, in China, more than 50% of total social debt consists of bank loans, whether from household debt or hidden debts from local governments. Therefore, China’s deflation is a classic case of debt-driven deflation, involving simultaneous drops in wages and prices, rising unemployment rates, and an increase in the real value of debt. This is the most painful form of deflation, contributing to a heavy atmosphere of economic struggle.
China’s deflationary crisis presents a significant challenge that requires swift and comprehensive measures to counteract. The Chinese leadership must address the underlying causes of this economic downturn, such as excessive borrowing and tightening liquidity. Implementing policies to stimulate consumption, encourage investment, and stabilize prices will be crucial in averting a deeper economic crisis. Without proactive measures, China risks prolonged economic stagnation, with far-reaching consequences for both its domestic and global economic standing.
