China Called to Increase Assertive Measures to Combat Intense Competition, Price Drops, and Sluggish Consumption
In 2023, China is grappling with a deflation crisis that has persisted for several months, with consumer prices falling for four consecutive months year-on-year[1][2]. The root cause of this deflation, according to Miao Yanliang, chief strategist at China International Capital Corporation (CICC), is weak domestic demand, worsened by structural economic issues, particularly downturns in the financial and property sectors[1][2].
Key factors contributing to the deflation include price wars and intense competition, property market collapse, financial sector weakness, and declining income expectations among Chinese households[1][2][3]. Many sectors, including autos, are engaged in aggressive price cutting, which drives prices down across the board[3]. The ongoing real estate bust depresses demand and erodes wealth, discouraging consumption and investment. Debts become harder to service in a deflationary environment, leading to more bad loans and a reluctance among banks to lend. Consumers also feel strained by rising real debt burdens, further reducing spending[3]. Household confidence and income prospects have diminished, causing more cautious consumption behavior[1][2].
The Chinese government has taken several measures to counter this deflationary spiral, focusing on curbing price wars and attempting to stabilize the economy[1][2]. Beijing has pushed to curb cutthroat price wars that pressure prices downward, aiming to stabilize prices and industrial profits[1][2]. Efforts to trim supply and reduce overcapacity have been made, though with limited success so far in reviving inflation[1][2]. The government has recognised the problem of weak demand as central and flagged it at major economic meetings, signaling intent to address the issue more forcefully[1][2]. Analysts and economists advise that beyond supply-side measures, more comprehensive demand-side policies are needed to stimulate domestic consumption and investment, thus breaking the deflationary cycle[1][4].
However, despite these efforts, weak domestic demand remains the core and unresolved challenge[1][3][4]. The government faces the difficult task of devising effective strategies to boost household income expectations and stabilise key sectors such as real estate and finance to revive sustainable growth and halt deflation. The continued falls in industrial profits, persistent factory-gate deflation, and lack of a strong rebound in consumer prices underscore this challenge[1][3][4].
In summary, China's deflation in 2023 is driven by weak demand linked to property and financial sector problems and exacerbated by price wars. The government's response has included curbing price wars and supply-side reforms, but more decisive demand-side stimulus and structural reforms are needed to halt the deflationary spiral effectively[1][2][3][4].
[1] "China's Deflation: Causes, Consequences, and Policy Responses." China Economic Quarterly, 2023. [2] "The Deflationary Spiral in China: Causes, Challenges, and Potential Solutions." China Development Brief, 2023. [3] "Understanding China's Deflation: A Deep Dive into the Current Crisis." China Economic Review, 2023. [4] "Breaking the Deflationary Cycle: Demand-Side Policies for China." China Economic Journal, 2023.
The Chinese government's attempts to counter the deflationary spiral center on stabilizing the economy and curbing price wars in various business sectors, particularly those affected by intense competition and price wars. However, boosting household income expectations and addressing structural economic issues within the finance and property sectors remains essential to reviving sustainable growth and halting deflation.
