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Ambrose Evans-Pritchard: Forget inflation, for deflation is the real danger now
By Ambrose Evans-Pritchard
The Telegraph, London
via MSN Money, Redmond, Washington
Thursday, June 8, 2023
The global inflation shock of the last two years is over except for the shouting. Legacy effects will generate much noise for a few months but the one-off spike is reversing almost everywhere with an elegant symmetry.
China is sliding into outright deflation as its post-Covid recovery peters out. Wage cuts are spreading in a sureal replay of what happened in Europe and America during the 1930s. Such is the Spartan ethos of Xi Jinping's "common prosperity" campaign.
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The Chinese producer price index has been negative for seven months, and the downward slide is accelerating. The headline CPI inflation rate has already dropped to 0.1% and will soon be negative. The Shanghai region is at minus 1.1% already.
This has large implications. China remains the workshop of the world, with the scale to shift the global pricing structure. It needs to export its way out of an economic depression and will not hesitate to do so with a cheaper yuan, down 12% since early 2022. A wave of disinflation is coming our way.
Wei Yao from Societe Generale says the regime seems paralysed in the face of a deepening Japan-style trap. "The zero-COVID shock and the housing crash last year seem to have brought China's implicit government debt stress close to a breaking point. For China to escape a severe deflation scenario, the policy mindset requires a reset. We have seen little willingness so far," she said.
Land sales for developers underpinned local government budgets during the property bubble. The real estate crash has dried up the revenue, setting off a funding crisis. Forced belt-tightening has neutralised a key instrument used by Beijing to inject stimulus into the economy.
Caixin magazine reported last week that the local authorities are drowning under $10 trillion of "hidden debt" they can no longer fully service. Some are having to cut medical benefits for the elderly.
The orthodox -- IMF -- way out is to wipe the slate clean with root-and-branch restructuring of debts, which is what Japan failed to do in the 1990s, and China is now failing to do, because it is traumatic and runs into powerful vested interests. ...
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