Falling prices in the world’s second-largest economy are likely to drive down costs globally, given China’s status as the world’s factory, said EdenTree Investment Management and Gama Asset Management SA. Weaker inflation will allow central banks to refrain from raising interest rates further and possibly move towards easing to support the slowdown.
The prospect of global price pressures slowing down could be one of the positives of China’s plunge into deflation as the economy struggles to recover. Inflation is likely to remain subdued as a downturn in the real estate market and troubles in China’s shadow banking are limiting spending and investment by both consumers and businesses.
“A weak China could lead to a peak in monetary tightening,” said Christopher Hiorns, portfolio manager at EdenTree Investment. “It would also dampen demand for commodities, which would reduce inflationary pressures and could allow the Western economy to work harder.”
World inflation and central bank rates
Inflation in the US and elsewhere accelerated in the post-pandemic years, dampening consumer purchasing power and forcing central banks to raise interest rates. China’s predicament is different due to a number of circumstances, including a prolonged downturn in the real estate market, which has eroded confidence and cut spending. In 2023, the prices of Chinese goods for the US fell every month.
“On the positive side, a slight deflation and slow growth in China will dampen inflation in the rest of the world even faster,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management. However, a slowdown in China will also lead to a slowdown in Asia and Europe, he added.
De Mello told Bloomberg that China’s export of deflation is positive for bondholders and emerging market assets.
To be sure, the impact of Chinese deflation on the world’s largest consumer, the US and other trading partners, may be minor and transitory. US purchases of Chinese goods have declined, and Russia’s war against Ukraine is pushing up the price of commodities like oil.
On the current path, a mitigated slowdown in China would have a limited impact on the US economy or Federal Reserve calculations. This could result in the Fed cutting rates earlier than expected.
In addition, further stimulus from the Chinese authorities could help stem the economic downturn and lower prices. On July 15, the People’s Bank of China unexpectedly cut its key interest rate to the highest level since 2020, reflecting growing concerns about a worsening outlook.
“Weakness in the Chinese economy and apparent deflation are a clear deterrent to global inflation,” said Gary Dugan, chief investment officer at Dalma Capital Management.
Problems in China and the position of the United States
Recall that US Treasury Secretary Janet Yellen called China’s economic problems a “risk factor” for the US, but nevertheless, this did not greatly undermine her optimism about the US economy.
“A slowdown in China will have the biggest impact on its Asian neighbors, but there will also be some repercussions in the United States,” Yellen said.
Earlier, US President Joe Biden called China’s economic problems a “time bomb” and called the leaders of the Communist Party “bad people.”
2023-08-16 05:29:06
#Problems #China #bring #benefits #global #economy #Bloomberg
