China’s deflation crisis puts global markets at risk

As China faces growing economic challenges, global investors are being urged by one of the world’s largest independent financial advisory and asset management organisations to reassess their strategies in light of increasing deflationary pressures in the world’s second-largest economy.

The message from Nigel Green, the CEO of deVere Group, comes as recent data from the National Bureau of Statistics indicates that China’s industrial producer prices fell by 1.8% year-on-year in August, marking the steepest decline in four months.

This decline comes on the back of weakening sectors such as steel and agriculture and further underlines the broader concerns about the country’s sluggish economic performance.

The recent figures starkly contrast with July’s 0.8% drop and also fell short of analysts’ expectations of a 1.4% decline.

At the same time, China’s consumer price index, which rose by a mere 0.6% year-on-year, underscores the persistent lackluster demand in the economy. While this slight uptick exceeded July’s 0.5% increase, it still came in below the 0.7% rise anticipated by many analysts.

“The subdued inflation figures suggest that many of China’s manufacturers, food processors, and other key industries continue to grapple with weak domestic demand and pricing power, reflecting deeper economic vulnerabilities that could have significant global repercussions,” observes Nigel Green.

“These developments raise urgent concerns for international investors, as China’s economic performance often serves as a bellwether for global markets.” The deflationary forces at play in the Chinese economy are a worrying signal of broader economic instability.

As former central bank governor Yi Gang highlighted last week, China is in dire need of ‘proactive fiscal policy’ and more accommodative monetary measures to stimulate demand and prevent deflation from taking root.

The deVere CEO says: “The country’s GDP deflator, a broad measure of price changes, has been negative for several quarters, signaling entrenched deflationary pressures.

“If left unchecked, deflation could trigger a damaging cycle where companies are forced to cut prices to stay competitive, which in turn squeezes profits, reduces investment, and leads to wage cuts and layoffs.

“The knock-on effect of such a cycle would be diminished consumer spending, further weakening domestic demand and exacerbating economic stagnation.” For global investors, the potential for a deepening deflationary spiral in China presents significant risks.

“Should deflation become entrenched, it could destabilize not only Chinese markets but also global supply chains and investment flows,” says Nigel Green.

“Investors with significant exposure to Chinese assets or companies that rely heavily on Chinese demand should be particularly vigilant.

“The deflationary environment is being driven in part by China’s ongoing property market downturn, now in its third year, and by intensified competition in manufacturing sectors that are pushing prices lower.

“These structural issues in the Chinese economy could persist for some time, making it essential for investors to avoid complacency.” Given the evolving situation, investors must carefully reconsider their exposure to China and other markets that may be affected by the ripple effects of its economic slowdown.

A cautious approach may involve further diversifying investments across regions and sectors that are less vulnerable to China’s deflationary pressures. However, should the Chinese government implement aggressive fiscal and monetary stimulus measures, it could present opportunities for re-entry into the market.

But if policy actions remain limited or ineffective, the deflationary pressures could deepen, making it prudent to remain on the sidelines or reduce exposure.

“The deflationary forces brewing in China could trigger a cascade of economic disruptions that ripple far beyond its borders, destabilizing markets and shaking investor confidence worldwide. In the face of these mounting risks, a failure to respond with decisive action could leave even seasoned investors exposed to considerable losses,” concludes the deVere CEO.