China's Next Problem--Deflation

China’s central government is worried about deflation. The problem may be bad for the world’s most populous country, but good for the rest of the world. China’s unemployment rate maybe rising as it shuts factories, but a drop in costs across the mainland would probably lead to a drop in the costs of the goods that it exports. That may be a key to increasing consumer spending in other nations.

To be ready to react to a global economic recovery, China has to survive a deflationary period with most of its industry intact, which is not a sure thing. According to the AP, “While falling prices might seem a welcome trend, a long spell of deflation can lead to destructive declines in wages, stocks and property prices, sapping corporate profits and prompting businesses to cut jobs and investment.”

The government in China has benefited from a multi-year surplus due to favorable trade balances. It is probably able to support its major industries through a sharp contraction. But, to aid will not be enough to keep that large exporters of clothing, consumer electronics, toys, and drugs operating at capacity great enough to meet the rising demand they will face when the economy turns. To keep as many factories open as possible and to keep as many people as possible in their jobs, China will need to cut prices on the goods it exports.

That, in turn, will make imports coming into the US and Europe more affordable. China’s deflation may be critical to a recovery in the West.

Douglas A. McIntyre