The fortunes of global investors including that in US markets are going to hinge a lot on the Chinese economy. There are troubling signs of deflationary pressures affecting Chinese businesses as the economy worsens, endangering Beijing’s stimulus measures if consumers choose to postpone spending.
As China grapples with a serious deflation threat, investors worldwide must prepare for the fallout and adjust their strategies accordingly, warns the CEO of one of the world’s largest independent financial advisory, asset management and fintech organisations. The warning from deVere Group’s Nigel Green comes as China reports July inflation on Wednesday, with markets looking for further signs of deflation.
“China saw its biggest drop in exports last month since July 2020, according to official figures released today. Apart from a brief rebound in March and April, exports from China have been on a constant decline since October 2022. The weak data and fear of recession across the western part of the world is keeping markets on the toes,” says Riches Vanara, Technical And Derivatives Analyst, StoxBox
The government has been actively playing down fears about deflation, with officials from the People’s Bank of China and National Bureau of Statistics, among other agencies, repeatedly saying there is no basis for long-term price declines. Talking about the threat publicly is also off the agenda for many China-based analysts and economists.
Nigel Green comments: “China’s economic trajectory has been a focal point of global attention for decades, with its staggering growth and transformation capturing the world’s imagination. But the recent emergence of serious deflationary pressures in the world’s second-largest economy is triggering concerns that extend well beyond its borders.
This economic phenomenon has the potential to set off a chain reaction of global repercussions that could reshape financial markets, trade dynamics and even international relations.”
Deflation, a persistent decline in prices of goods and services, can be as detrimental as rampant inflation, “if not more so”, states the deVere CEO.
In China’s case, the underlying factors driving deflation are complex and interconnected; rooted in weak consumer demand, declining exports and a highly subdued but critical property sector.
“The deflationary environment can put pressure on central banks to implement aggressive monetary policies, such as lowering interest rates or engaging in quantitative easing. This could distort global financial markets, affecting asset prices and investment strategies. The interconnected nature of the global economy means that China’s deflation doesn’t remain confined within its borders,” adds Green.