China's Economy Slips Into Deflation: How Will It Impact The World?

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Apurva Dhamankar

9/3/20231 min read

Simply put, deflation is the opposite of inflation. It refers to a continuous and general reduction in the overall price levels of goods and services in the economy.

The deflationary environment supports consumers to buy goods and services for the same amount of money at cheap rates. However, deflation can occur for various reasons, such as less consumer demand, overproduction of goods, technological advancements that lower production costs, or tight monetary policies by central banks.

In China’s case, decreased consumer demand and economic slowdown are the vital reasons. while cheaper goods may appear beneficial for purchasing power, falling prices pose a risk to the broader economy as consumers tend to delay purchases in the hopes of further reductions.

Inadequate demand then forces companies to produce less, stop hiring or lay off workers, and agree to new discounts to sell off their stocks dampening profitability even as costs remain the same. The country is also tackling rising local government debt and struggling with the housing market. Falling prices make it harder for China to lower its debt.

China's growing economy is also an essential source of global demand. Its economic adjustments will create hopes for manufacturing exporters, though it may diminish demand for commodities over the medium term. China is a growing influence on other developing economies through trade, investment, and ideas. Also, the enlarged period of deflation in China may help to curb rising prices in other parts of the world, including the United Kingdom. This is because China remains one of the largest producers of goods sold around the world.

Thank you.

Regards,

Karan Shah,

Kautilya, IBS Mumbai.

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