China has slipped into deflation, raising concerns that a slowdown in the world’s second-largest economy will affect the UK and elsewhere.
Official figures showed consumer prices in China fell 0.3 per cent year-on-year last month, down from zero in June and the first fall since February 2021.
While the decline presents the opposite situation faced by countries such as the UK and US, which are struggling with high inflation, the data has fuelled fears that China faces slipping into lost decades of stagnant prices and wages, as happened in Japan following the collapse of a real estate bubble in 1991.
Deflation is often a bigger concern for governments and central bankers than inflation, as falling prices erode the profits of business and hit confidence and investment, key causes of mass job losses and unemployment.
‘The move into deflation is a clear sign of weakening,’ said Tom Hopkins, portfolio manager at BRI Wealth Management.
Bustling: Nanjing Road in Shanghai is a busy shopping district. Figures showed consumer prices in China fell by 0.3% year-on-year last month
He added that there was a ‘lack of clarity’ from Beijing on stimulus measures to revive the economy, that was likely to put off foreign investors and trading partners.
Any recovery in consumer spending was ‘likely to be drawn out and uneven’ said Duncan Wrigley, the chief China economist at Pantheon Macroeconomics.
But he pushed back on comparisons with Japan, saying that China’s economy was less developed than Japan’s in the 1990s and was ‘still able to catch up’.
He predicted that the slump would last between two and three years.
A Chinese downturn presents a threat to the UK economy and investors, as the country is a key source of revenue for many large British firms.
Mining companies such as Rio Tinto and Anglo American are acutely exposed to China as its resource-hungry industrial and construction sectors consume vast amounts of raw materials such as iron ore.
Luxury clothing firm Burberry counts China as a core market as its middle class splashes out on its trench coats and bags.
It was initially hoped that China would experience a boom after it removed the last of its strict lockdown measures, which were some of the harshest and longest-lasting in the world.
But this resurgence has failed to materialise, amplifying concerns that sluggish growth in China will spread across the global economy.
These worries were bolstered this week when trade data showed sharp falls in Chinese imports and exports to its major markets as it was hit by falling domestic demand and lower consumption from abroad as Western consumers tightened their belts.
The glum figures have compounded previous signs that China’s economy is struggling.
Last month, official figures showed the country’s gross domestic product (GDP) expanded by just 0.8 per cent in the second quarter of the year, having grown by 2.2 per cent over the previous three months.
Another big issue the country faces is youth unemployment, which hit a record of 21.3 per cent in June – up from 20.8 per cent in May – as graduates struggle to find jobs.
A record 11.6m university leavers are expected to enter China’s workforce this year but will face a hyper-competitive market and a gruelling work culture which leaves many prone to burnout.
Last year, many on Chinese social media began to extol the virtues of tang ping, or ‘lying flat’, a term used for taking a break from relentless work and pushing back against China’s notorious ‘996’ culture of working 9am to 9pm, six days a week.
Compounding the general slowdown is also a festering debt crisis in the property market, which is a key driver of economic growth, accounting for as much as 30 per cent of GDP.
Confidence in the sector took a hit this week as Country Garden, one of the largest developers, was reported to have missed interest payments on some of its debt, causing its shares to plunge on the Hong Kong stock market.
Many are worried the situation threatens to turn into a repeat of a similar crisis at rival property giant Evergrande, which in 2021 defaulted on parts of its massive debt pile worth over £235billion.
