Is China Going Into A Recession? Country's Tiny Inflation Rate Has Economists Worried About Japanese-Style Doom Loop

As the U.S. continues to struggle with higher-than-ideal levels of inflation, China is facing the opposite problem.

Wednesday's CPI report showed an yearly rise of 4.9% in American consumer prices — a positive step in a disinflationary trend, but still far from the Fed's ideal place of 2% annual inflation.

Across the Pacific Ocean, China has seen its slowest rise in consumer prices in more than two years, with just 0.1% annual inflation registered in April.

If the trend continues, the world's second-largest economy would enter a period of deflation, which could prove devastating for its economic outlooks and growth plans.

The Problem With Low Inflation

While inflation is commonly equaled to crisis and catastrophe, some level of inflation is healthy for any economy. Too little inflation, or even deflation — known as a sequential drop in consumer prices — can cause consumers to halt spending and companies to stop investments in expectation of paying less for those same products and services in the near future.

Deflation slows economic growth and can lead to a downward spiral that weakens the overall economy by having less and less money circulating in the market.

As consumers ramp up their savings in expectation of increasing their future purchasing power as prices drop, if sustained over time, an economy in deflation will see salaries drop to accommodate lower prices, further hurting the population.

It can also hurt those in debt, as fixed-rate loans become more expensive to pay if salaries go down.

A history of stagnating prices hampered economic growth in Japan for more than two decades, with the country being able to break away from this only cycle recently.

‘Deflation Has Begun'

Liu Yuhui, a professor from the Chinese Academy of Social Sciences, a CCP-backed Chinese think tank, said in a recent speech that "to describe China's current economic situation in a word, deflation has begun, and the economy has fallen into recession territory."

Real estate prices and financial assets are not rising in the country, he added. Heavily indebted households have gone into discretionary spending mode, and a slowing inflation trend is only making things worse.

Li Daokui, a former Chinese central bank advisor and professor of economics at Beijing's Tsinghua University, is advocating for the government to issue cash handouts in an effort to ramp up spending within the domestic economy, CNN Business reported.

On the other side of the fence is Bruce Pang, chief economist at Jones Lang Lasalle, who told Reuters that “China is still in the stage of disinflation, not deflation." He's still bullish on China's ability to turn the tables on its disinflationary trend.

China's Slow-down In Numbers

As China is faced with the monumental task of avoiding a hard-landing scenario due to a worrying demographic trend, a new and more short-term crisis begins to loom for the Asia giant.

China's 0.1% yearly inflation in April is substantially lower than the 0.7% registered in March, as Reuters reported. Producer prices have officially entered deflationary territory, with the producer price index falling 3.6% year-over-year, following a 2.5% in March.

These trends can be understood as consequences of China's rapid reopening policies which erased years of strict COVID-19-related restrictions in just a few months. The reopening fueled a short-lived economic boom, but that inertia appears to be wearing off.

The rate of borrowing also dropped from March levels, according to Bloomberg, further showcasing a country-wide trend to reduce non-essential spending.

"We do not think domestic demand can improve significantly in the near-term, estimating it will take three to five years to rebound," Xing Zhaopeng, senior China strategist at Australia and New Zealand Banking Group, said to Bloomberg.

There continues to be a great gap in demand today as compared to pre-pandemic levels, he added, meaning that China is still recovering from the COVID-19 pandemic.

Impact on stocks: U.S.-listed ETFs following the Chinese economy showed mixed results on Thursday.

• iShares MSCI China ETF MCHI was up 0.55% at the time of this writing.
• KraneShares CSI China Internet ETF KWEB was up 3.19%.
• SPDR S&P China ETF GXC was down 0.26%

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