China’s yuan has tumbled in recent weeks.
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China’s consumer price index fell 0.5% in November from a year ago, the worst drop since the pandemic.
But that’s good news for the West, which could “import” some of that deflation back home, analysts say.
“China’s deflation problem could be a welcome dis-inflationary restraint for the ‘West’.”
China is seeing prices head down again as its economic difficulties persist, but Beijing’s woes could be wins for the West, analysts say.
That’s because China’s deflationary trend could create a drag on prices that run hotter than desired in places like the US.
“The longer that China fails to show that it can recover, the likelier that inflation expectations will decline in the West, as fears that China can export its deflation to the rest of the world through international trade will gain ground,” strategist Thierry Wizman from Macquarie shared in a note on Monday.
China’s consumer price index dropped 0.5% in November from a year ago, the worst decline since the depths of the pandemic. That dashed hopes for a recovery after prices rebounded earlier this year from a prior dip into negative territory.
On the other side of the globe, the US consumer inflation over the same period slowed to a 3.1% annual rate from 3.2% in the prior month.
While Wall Street welcomes slower inflation, it still runs above the Federal Reserve’s 2% target. And with American investors trying to guess when the Fed will begin to slash elevated interest rates, those inflation numbers are under extra focus.
Like Wizman, Societe Generale analyst Albert Edwards saw China’s deflationary data as a sign of relief for the West, which would love to “import” some of those price declines back home.
“China’s deflation problem could be a welcome dis-inflationary restraint for the ‘West’,” he wrote in a note on Tuesday.
China’s deflation isn’t a shocker as it’s a symptom of an intense economic hangover from a crumbling property sector, a hemorrhage of foreign capital, and lackluster post-pandemic growth.
That’s in contrast with still-healthy GDP growth in the US. But a sudden reversal could make Chinese deflation more of an obstacle instead of a benefit.
“The fly in the ointment might well be that, if a US hard landing is imminent (reflected in weak money supply) and triggers a collapse in US domestic inflation anyway, importing an extra slug of Chinese deflation would then be extremely unwelcome and throw the Fed into a tizzy,” Edwards wrote in Tuesday’s note. “Mind you, at least US bond investors would be delighted.”