Economists Fear China May Be Heading for Deflation


More disappointing data from China will do little to allay concerns about the world’s second-largest economy, as manufacturing activity contracted for a fourth straight month and a gauge for the services sector fell to its lowest level this year.

That is adding pressure on Beijing to introduce a stimulus package to kick-start a post-pandemic economic recovery — but some analysts warn that China’s high debt levels may make that unlikely.

Economists fear China may be heading for deflation, even as the rest of the world worries about inflation. The Chinese economy grew just 0.8 percent in the second quarter, compared with the previous three months, hurt by weak consumer spending, high youth unemployment and a downturn in real estate.

Overseas demand for Chinese goods, which boomed during the pandemic, also fell as global growth stalled and central banks raised interest rates to combat high inflation.

Officials have already taken some steps to revive growth, as part of their efforts to bolster a “tortuous” recovery. That includes measures announced today to encourage car buying and to improve energy efficiency for rural households.

But the package is a far cry from the kinds of broader fiscal stimulus that markets had wanted. “The problem with these measures is that they are too small to matter,” Michael Pettis, a finance professor at Peking University, wrote on X, because they don’t increase consumption if households still have only a limited amount of money to spend.

Investors are still holding out for a bigger move. Stocks in Hong Kong and mainland China rose on hopes that Beijing would eventually announce something more drastic. “We can only put this down to continued hope that the government will pull something out of the bag that will reinvigorate the economy,” said Robert Carnell, head of Asia-Pacific research at ING.


– The New York Times



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