While most of the world’s central banks battle inflation, “China is grappling with falling prices,” says Laura He on CNN. The country’s consumer price index fell by 0.5% in the year to November, the second successive month of deflation. That’s a symptom of frail underlying demand. Deflation can weaken activity by encouraging consumers to “put off purchases... in anticipation of prices falling further”.
Consumer confidence still hasn’t recovered from the “brutal one-two punch” of “the housing meltdown of late 2021”, followed shortly thereafter by “the ‘zero Covid’ lockdowns of 2022”, says Nathaniel Taplin in The Wall Street Journal.
The economy is caught in a vicious circle: a weak labour market makes households unwilling to buy property, but the weak property market – comprising 25% of GDP – is in turn exacerbating the unemployment situation. The only way out would seem to be a major government bailout of property developers, but that is a political a non-starter. Beijing is determined to avoid a return to the days of rampant property speculation.
Stimulus stigma
With property developers and local governments heavily indebted, most Western economists think the solution is for China’s central government to step in with a major fiscal stimulus, says The Economist. But while Beijing has made modest moves in that direction, officials seem to fear doing too much rather than doing too little.
Recent history explains why. Fifteen years ago, China unleashed a vast fiscal stimulus package in response to the global financial crisis. The measures led to “frenzied” spending and borrowing by
