Finance & Economics

China Strategist Shaun Rein Warns of Deflation

In the foreseeable future, deflation may become a factor influencing the dynamic of the process of growth of the Chinese economy.

China Strategist Shaun Rein Warns of Deflation

The first half of the current year is likely to be a so-called painful period for Beijing. In this case, the expected state of affairs in the Chinese economic system is implied. Beijing will face a difficult situation that requires certain decisions, the choice of which depends on how the leadership of the Asian country assesses the state of the economy.

Shaun Rein, founder of China Market Research Group, said last Monday, January 22, during a conversation with media representatives that investors should be careful when planning interaction with businesses in China. According to him, the current state of affairs in the economic system of the Asian country is negative. Shaun Rein said that the actual level of confidence in the Chinese economy is the lowest in the 27 years during which he has been living in this state.

The expert noted that Beijing is now beginning to face manifestations of deflation. Shaun Rein noted that Chinese residents are waiting for discounts. He drew special attention to the fact that at present, the consumer community of the Asian country is registering moods that can be described as nervous.

Traditionally, deflation, which is associated with the realization of a downward trend in the cost of goods and services, is associated with a slowdown in economic growth. Against this background, questions arise about China’s prospects. In this case, it means Beijing’s ability to stimulate a positive dynamic economy. Concerns about this and the lack of confidence in a significant improvement in the situation in the mentioned sphere are largely due to the negative experience of last year. Many experts expected that in 2023 there would be a rapid recovery of the Chinese economic system after the abolition of the zero-tolerance policy for coronavirus, which limited the processes of business and industrial activity in the country. However, hopes for an improvement in the situation did not coincide with reality, which turned out to be far from the expected state of affairs, which was the content of optimistic forecasts.

In December 2023, the low cost of pork, whose share in China’s CPI basket is about 20%, became a kind of signal of a high probability of deflation. Shaun Rein says that such a prospect is a serious problem for the economic system of an Asian country. He noted that the Chinese authorities do not want negative scenarios to be discussed in the public plane, but still, there is a need to worry about these variations of the future in the economic dimension.

Shaun Rein said that the decision to keep the prime rates unchanged in the Asian country is surprising given the current realities. In his opinion, this indicator should be reduced. Sean Rain says that this decision could create certain incentives.

On Monday, January 22, the People’s Bank of China kept the prime rates on one-year and five-year loans at 3.45% and 4.2%, respectively. It is worth noting that this decision is in line with many analysts’ forecasts. Prime rates are a kind of benchmark for most household and corporate loans in China and one of the levers used by the country’s financial regulator as part of efforts to stimulate the economy.

Investment banks are currently inclined to moderate expectations regarding the prospects of the Asian country in 2024. According to analysts of these organizations, China’s economic growth will slow down in the current year. Beijing has set an official target for the corresponding indicator at 5%.

Last week, Chinese Premier Li Qiang, during a speech at the World Economic Forum in Davos, Switzerland, said that the Asian country’s economy grew by 5.2% in 2023. At the same time, in this context, he noted that Beijing did not apply large-scale stimulus measures and did not seek short-term growth, accumulating long-term risks. Li Qiang said Beijing was focusing on strengthening internal drivers.

In November 2023, the International Monetary Fund predicted a slowdown in Chinese economic growth to 4.6% in 2024. Moody’s said last week that the real GDP growth of the Asian country in the current year will be 4%, noting that the corresponding dynamic will continue in 2025. In the period from 2014 to 2023, this indicator averaged 6%.

The slowdown in economic growth may become a kind of threat to the head of the People’s Republic of China, Xi Jinping, whose political party has strengthened national legitimacy during a more favorable period. Also, China’s status as the second largest economy in the world has become a factor of positive influence on its position in the international arena.

Shaun Rein says that Beijing may face difficulties against the background of economic growth at the level of 5% because the authorities are focused on social transformation. According to him, the Chinese Communist Party does not necessarily prioritize the restructuring of the economic system, giving greater priority to the reform of society. The expert says that against the background of the mentioned benchmarks, it is highly likely that the government of an Asian country defines economic growth at the level of 4%-5% as a new norm over the next 3-5 years.

Shaun Rein notes that Beijing is striving to achieve the goal of a more just society. Against this background, there is a kind of transformation of the Chinese economic system toward slower growth.

Speaking about the most tremulous sectors of the Asian country’s economy, Mr. Rein drew attention to the once bloated real estate market. This specialized space accounts for about a third of China’s economic activity. The real estate market has been in a downturn amid Beijing’s broad-stroke crackdown on the debt level of developers. Such giants of this sector as Evergrande and Country Garden have become the main casualties of the clampdown.

Shaun Rein says that Chinese buyers assume that the cost of housing may continue to fall. He noted that many local consumers are currently refusing to make purchases in the real estate sector. In this case, the motivation for the decision is the fear that prices will continue to fall in the foreseeable future.

The mentioned consumer behavior reinforces concerns that it will take Beijing more than 10 years to eliminate the current overhang in housing inventory.

As we have reported earlier, China’s Annual Exports Demonstrate Decline.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.