China is currently facing its longest period of currency deflation since the 1960s. According to Bloomberg, major Wall Street banks such as JPMorgan and Citigroup predict that China’s deflationary situation will continue until 2025, a scenario unseen since Mao Zedong’s Great Leap Forward movement in the 1960s.
Based on a survey conducted by Bloomberg with 15 analysts, the median forecast for China’s GDP deflator in 2025 is projected to reach -0.2%. In contrast, the average figure for this index was 3.4% in the decade before the pandemic.
By the fourth quarter of 2024, China’s GDP deflator may have been in negative territory for seven consecutive quarters, matching the record set during the Asian financial crisis of the 1990s. It is expected that the GDP deflator will decline for the third consecutive year by 2025.
JPMorgan’s chief China economist, Zhu Haibin, stated, “A negative GDP deflator or weak nominal GDP growth will directly harm the economy through reduced corporate profits and fiscal revenue, and indirectly harm the economy through soft revenue growth.”
According to official data from Beijing, the industrial sector, primarily focused on manufacturing, saw a price decline of 2.3% last year, the largest drop among all industries, followed by real estate and transportation sectors.
In the manufacturing sector, currency tightening reflects long-term weak domestic consumption demand, while production levels remain high. The severe imbalance between supply and demand has led to the industrial sector facing the most severe currency tightening pressure for the second consecutive year, with intense competition between factories leading to a significant decline in profit margins and lower export prices, resulting in increased overseas shipments. Last year, the trade surplus reached a new high, sparking a wave of protectionism globally.
Louis Kuijs, Chief Economist for S&P Global Ratings in the Asia-Pacific region, commented, “A structural feature of the Chinese economy is that many companies continue to maintain or expand production capacity even with low or negative profitability. This situation is not likely to change soon.”
In the real estate sector, property investment has been shrinking for over two years and is almost certain to plummet again by the end of 2024. The real estate crisis has caused approximately $18 trillion of Chinese household wealth to evaporate, leading people to save rather than consume. The continued decline in property investment has also dragged down the construction industry’s growth.
Currency tightening could become an invisible killer of the economy. With expectations of continued price declines, people delay purchases, reducing corporate profits and leading to pay cuts, layoffs, and decreased investment. Unemployment further decreases general consumer spending, causing prices to spiral downward, creating a vicious cycle.
So far, the pressure of currency tightening is most pronounced in the manufacturing and real estate sectors, while industries such as hotels and catering have seen price increases, indicating more flexible demand in the service sector. However, economists at BNP Paribas predict that due to slowing wage growth, the service industry may face greater downward pricing pressure in 2025.
(Reference: Bloomberg)