Prices in China have fallen more sharply than they last did during the financial crisis 15 years ago. According to experts, a permanently falling price level can cause great economic damage.
Consumer prices in China fell significantly in January compared to the same month last year. The statisticians calculated a decline of 0.8 percent, as the Chinese statistics authority in Beijing announced.
Experts had expected a smaller minus. The last time there was a similarly strong decline was around 15 years ago, at the time of the global economic and financial crisis.
Days off work boost consumption
This means that deflationary pressure remains high in the world’s second largest economy. The statistics office justified the difference in the annual comparison with the Spring Festival, which fell on January 22nd in 2023 and will not take place until next Saturday this year.
The lunar calendar festival, also known as Chinese New Year, along with its non-working days, is a major driver of consumption in the country. Millions of people travel or shop for the celebrations during this time.
Falling prices can mean layoffs
Compared to December 2023, consumer prices rose by 0.3 percent, for the second month in a row. The deflationary trends are weighing on the Chinese economy. Most economists consider deflation – the opposite of inflation, i.e. a permanently falling price level – to be more economically dangerous than slightly rising prices.
At first glance, consumers benefit because they have to pay less for goods and services. However, deflation usually also puts pressure on companies’ profits and thus poses the risk of an economic downward spiral with wage cuts and layoffs.
Investors withdraw capital
China’s economy has been struggling with the consequences of the corona pandemic for months. However, consumption in the country of around 1.4 billion people is weak. Foreign investors also have less confidence in the economy and are withdrawing their money, which has recently been observed in falling prices on the stock exchanges in China.
On Wednesday, Beijing replaced the head of the securities regulator without giving reasons. In addition, a severe real estate crisis is slowing the Chinese economy. The government has recently taken countermeasures, for example by relaxing regulations for banks regarding cash reserves, which should make it easier to grant loans.