The Chinese economy can’t seem to catch a break these days. Two years ago, analysts—along with the Chinese government—were concerned about overheating and runaway inflation. For the past couple years, there’s been an equal but opposite worry that China has reached the beginning of the end of the long period of rapid growth.Via Meadia is less concerned about a temporary Chinese slowdown, whether the landing is “hard” or “soft” than we are about the prospect for a phase change in Chinese growth — a secular slowdown in growth as the Japan-style export led strategy reaches natural limits. But the short term fate of China’s economy has a lot of influence over what happens in the rest of the world given our shaky circumstances right now. And China watcher Evan Osnos offers some sobering observations in the New Yorker:
Already, Nike says that its Chinese stockrooms are piling up with inventory. Similar complaints are coming in from McDonald’s, Caterpillar, and Procter & Gamble Co. Within China, the stakes of a slowdown are high as well: for half a century, political scientists have recognized that political unrest does not tend to erupt in places that are most deprived; it hits when a pattern of rising growth and expectations abruptly stops. And that is Beijing’s worst fear. […]There is a slowdown in steel and copper production, the first layoffs in a decade by manufacturers of construction equipment, and electricity production, which usually grows faster than the economy, grew by just 0.7 per cent in April, suggesting to those inclined to see it that growth may have flatlined. There are physical signs, too: coal and iron ore and other commodities are piling up at Chinese ports, and the huge fleet of coastal ships that usually move them around have been forced to venture beyond the Chinese seaboard, sailing out to look for new business—the freight equivalent of deer wandering out of the woods in search of food. Because it materialized out of the shadows, shipping people have it named the “ghost” fleet.
On top of all this comes today’s news that China may actually be headed for a period of deflation. According to the New York Times, consumer prices dropped 0.6 percent last month, one of the largest such drops in years. Coming on the heels of months of anemic growth, this has many worried:
Producer prices, measured at the factory gate, were down 2.1 percent in June compared to a year earlier, and down 0.7 percent in June compared with May. Those prices had started to weaken late last summer, about six months before consumer prices began eroding. […]A few economists are starting to ask whether China could face deflation, a sometimes intractable condition of falling prices that can become self-reinforcing, as Japan has found over the past two decades.
This deflation has not yet reached alarming proportions, but the alarm bells will be going off in Beijing if it continues much longer. Look for China to fight any signs of deflation with vigorous stimulus measures; short term, at least, that could be good for the rest of the world.[Update: A previous version of this post mistakenly claimed that Chinese deflation stood at 6 percent rather than 0.6 percent. This mistake has been corrected.]