Xi Jinping stated that 2025 will be a tough year for reform. He certainly has that right.
The situation in China is bad. Prices are falling and it is something that will continue for the next couple years. China finds itself in a deflationy stituation that will carry into 2026. There is the potential that will last until '28 or '29.
But wait, aren't falling price good? That is what the anti-inflationists state. They believe "inflation bad, deflation good".
Nothing could be further from the truth.
In this article we will look into the situation with China and why their deflation is dire.
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China: Multi-Year Deflation
China's deflation ramped up slowly. We first mentioned this a couple years ago. When look at macro-economic situation, we have to keep in mind this is not a one or two quarter thing. The timeline is based in years, not months.
Things are starting to come to ahead in China. Foreign investment is down, showing that outside investors do not like the prospects in that country. This is having a major impact upon the most crucial part of finance: confidence.
Prices are dropping because households are reducing their spending. When people feel their future economic prospects are worse, they stop spending. Under this scenario, the move is to cash.
Of course, busiensses respond. One tactic is to reduce payroll by either cutting hours or laying off workers. Also, those that deal in physical products start to cut the inventory they are willing to hold. This means less orders are place, impacting other businesses.
When this enter the rinse and repeat, we can see how it travels through the entire economy.
Economists like to tout how, during deflation, people will delay purchases due to falling prices. While that can happen in some instances, for the most part, people simply are unwilling to spend. The Business Cycle is the catalyst. During the downward slope, prices inevitably drop.
As a few will guess, this is not a good thing.
Trump Tariffs
Trump best be using tariffs as a threat. If he is serious about his plans to implement them, the golden age of Trump will mirror Herbert Hoover. He will might send the economy towards a depression.
Tariffs will destroy the economics of countries where they are placed. While this seems positive on the surfrace, at least from Trump's perspective, it is best to realize that the US will not be able ot sell goods in those countries. Again, prices drop because people stop buying.
When people cease purchasing, prices go down. It is why the solution to inflation is people to stop spending.
HIgher prices eventually end higher prices.
Unfortunately, the solution for lower prices is not lower prices. That is exactly what Trump will provide to the nations that have tariffs. As noted above, this ends up affecting jobs, economic optimism, and confidence.
Considering we have major parts of the global economy already in recession, this will only make it worse.
Chinese Central Bank
The People's Bank of China is screwed. They are in no better position that The Federal Reserve.
All central banks operate under the same misguided idea. Unless the PBOC comes up with a new economic theory, it is trapped.
Japan started the QE wave in the early 2000s, becoming the Grandfather of Quantitative Easing. The results, after more than 70 programs, was 20 years of nothing. The impact was negligable at best.
Japan was stuck in the same deflationary spiral as it was before. The situation only turned around when massive inflation hit the planet due to the global lockdowns. Crush global supply chains and that will happen.
Of course, things are returning to their previous trend. By 2030, it is likely that Japan will have experienced it 4th lost decade in a row.
While the outlook for China isn't quite as bleak, it is in for some massive pain over the next two years. We could see this extending based upon decision that have global impact.
Chin is a major part of the overall economy. Massive pain there is bound to spread.
Posted Using INLEO
