Four flash sales in a day! China, world’s second largest economy, hit by deflation – here’s why economists are worried – The Times of India

Rising prices or inflation is a common headache for economies around the world. But what about falling prices? Believe it or not, a sustained fall in prices, commonly known as deflation, is just as big a concern for governments, as is inflation. And, that’s the issue that the world’s second largest economy, China, is grappling with!
Recent data indicates China’s consumer price index declined by 0.7% year-on-year in February, falling short of projections, whilst producer prices decreased by 2.2%, continuing a downward trend since September 2022.
China’s expanding industrial capacity has contributed to export growth, yet it is simultaneously creating deflationary pressures domestically.
According to a Reuters report, February’s consumer price index recorded its steepest decline in 13 months, alongside persistent producer price deflation. This downturn reflects reduced seasonal demand and consumer hesitancy in spending, influenced by employment and income uncertainties.
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Following Beijing’s recent pledge to enhance consumption amidst escalating US trade tensions, analysts anticipate continued deflationary pressures in China’s economy, the report said.

What is deflation and why are economists worried?

Deflation occurs when prices of goods and services decrease across the board. During such periods, currency value increases with time. For many years, economists have expressed concerns about deflation.
Whilst deflation appears advantageous for consumers, who can buy more with their income over time, the effects of falling prices are not universally beneficial. Economists worry about how price decreases affect different economic sectors.
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China’s deepening deflationary concerns may continue beyond temporary seasonal variations, unless governmental action addresses the surplus production capacity that’s affecting price levels.
The ongoing price decreases have negatively impacted business earnings, employee compensation and government revenue. Sustained deflation could potentially result in diminished business investments and reduced consumer spending, says a Bloomberg report.
Financial institutions such as Citigroup Inc. and Nomura Holdings Inc. express concern that consumer prices might remain near negative territory throughout the year if domestic production continues to exceed consumer demand.
With the People’s Bank of China currently focusing on maintaining yuan stability rather than implementing monetary stimulus, addressing deflation will likely depend on policymakers’ success in managing excess production capacity, the Bloomberg report said.
As noted by Citigroup economists, including Xinyu Ji, whilst rebuilding consumer confidence could require several months and largely depends on property market stabilisation, China’s approach to supply-side reforms would be crucial for addressing factory-level deflation.

What’s causing deflation?

China’s rising youth joblessness, at 15.7%, is affecting consumer spending. With employment and income uncertainties, Chinese shoppers are increasingly patronising discount retailers, even as industrial production grows despite weak household spending.
Financial experts indicate that the growth of such discount businesses is contributing to deflationary trends, which could impact economic growth as these shops gain popularity over traditional retailers, similar to Japan’s experience in the 1990s.
“The broader shift toward more value-for-money purchases will play a role in deflationary pressures,” Lynn Song, chief Greater China economist at ING was quoted as saying by Reuters.
“This sort of intense price competition likely adds some pressure on more traditional retail models as well,” Song said.
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Four Flash Sales in a day in China

In its report, Reuters quoted an interesting example, symptomatic of China’s deflation.
At the expansive Wankelai establishment in Beijing, manager Leo Liu conducts sales through a microphone, offering increasingly substantial discounts during flash sales until he successfully sells items including a cotton jacket and a ladies’ undershirt.
Reflecting China’s deflationary economic conditions, Liu secured a buyer for the jacket at 20 yuan, a fraction of its original 239 yuan ($33) price tag. The 39-yuan undershirt had to be given away as no customers were willing to purchase it!
The store, which offers clothing, snacks and everyday household items near Beijing’s financial district, conducts these sales four times daily!
Widespread price reductions have emerged across sectors, from eateries offering 3-yuan breakfast deals to automotive manufacturer BYD reducing one of its vehicle prices to under $10,000.
Local coffee chain Luckin has overtaken Starbucks as the market leader by offering more affordable options.