As the West breathes a sigh of relief, China sinks further into deflation | Posted by Libertex (Europe) | Coins | December 2023

Many people predicted that the next century would be the era of China, and starting in the new millennium, the narrative of the rising star of the East is becoming increasingly stronger. This is not without basis in reality. Since 1978, China has achieved an average annual GDP growth rate of 9% and lifted 800 million people out of poverty. But the pandemic, especially the CCCP’s zero-corona policy, has predictably thrown a spanner in the works to some extent. China’s GDP growth fell to 2% in 2020 as the global shutdown slowed international trade. But the figure soared above 8% as Western economies reopened, before falling straight back to 2% in response to the party’s strict city-wide lockdown throughout 2022.

Now, after a period of extreme global inflation, something strange and worrying is happening in China. Prices are actually falling. great. China is officially experiencing deflation, following a 0.5% year-on-year decline in the consumer price index in November. While it may seem like a good thing on the surface, unchecked deflation is actually the worst kind of price pressure because it causes people to postpone spending in anticipation of falling prices. So what impact will this have on musical instrument prices in China and around the world?

China’s economic difficulties did not emerge in a vacuum nor were they completely unpredictable. In addition to the impact of Zero Corona, the long real estate downturn, youth unemployment, and the government’s crackdown on technology also played a role. These factors have been exacerbated by accelerated foreign capital outflows since the pandemic and strained relations with the United States over Taiwan. For Chinese tech stocks, the impact is almost disastrous. For example, both Tencent and Baidu have fallen nearly 50% since the end of 2021. Meanwhile, Alibaba, a well-known global company, fell about 65% during the same period. And now that prices are dropping positively across key sectors, it’s understandable that consumers are avoiding purchases where possible, which will hit these consumer-focused apps even harder.

International fuel sources such as oil and gas have also decreased significantly compared to the previous year, but Chinese industry is not utilizing them to their full potential due to weak domestic and international demand. Pressure is mounting on the Chinese government to take decisive action. Therefore, all eyes will be on the Politburo and Central Economic Work Conference (CEWC) to be held this month. PBC Governor Pan Gongsheng confirmed his commitment to a more ‘accommodative’ monetary policy aimed at boosting domestic demand and eliminating deflation. If expected CCCP support is in place, we can reasonably expect a resumption of multi-year low Chinese equity growth in 2024.

It’s no secret that the West has been struggling economically lately, but here it’s almost a mirror image of China. Inflation is spiraling out of control and both the US and EU remain well above targets, while fuel shortages linked to geopolitical instability in Eastern Europe are hurting both industry and consumers. As a result, the EURO STOXX 50 index has been fairly stagnant, barely rising 5% over the past two years. It was actually down until just a few weeks ago, gaining a full 10% in just over a month. These movements were reflected almost one-to-one in the S&P 500.

It is believed that this sharp rise may be due to China effectively “exporting” downward price pressure to the West. In fact, China accounts for 20% of Europe’s total imports in a trade relationship worth $2.5 billion a day. In a sentiment later echoed by Societe Generale analyst Albert Edwards, Macquarie’s Thierry Wizman wrote: “International trade will set the stage for deflation for the rest of the world.”

If this trend continues, inflation could normalize organically in the US and EU, which would eventually lead central banks to normalize monetary policy and adopt a more dovish stance each year through 2024. Of course, this means: Great news for stocks across the West.

Libertex offers CFDs on a variety of basic asset classes, from commodities, forex and cryptocurrencies to ETFs, indices and stocks. In addition to major Western indices such as S&P 500, EURO STOXX 50 and Nasdaq, Libertex also offers major China-related indices such as A50 and Hang Seng, as well as individual stocks such as Tencent Holdings, Baidu and Alibaba. For more information or to create a live trading account, visit www.libertex.com/signup.