China's economy is slowing

China's economy is slowing. Official data show its exports in July fell by 14.5% year-on-year in US Dollar terms. This was the steepest fall since February 2020, the start of the Covid-19 pandemic. The figures were much worse than independent forecasters expected. US imports from China are 24% down in the past year. China's imports in July dropped by 12.4% year-on-year. Manufacturing activity also contracted in July, for a fourth successive month. The consumer price index (CPI) fell by 0.3% in July, while the producer price index, fell by 4.4%. China is now in deflation.

2023 was supposed to be the year in which the Chinese economy rebounded from the nationwide lockdowns. That clearly isn't happening. The economic growth target for 2023 as set by Beijing is 5%, a modest enough target for a country that registered gross domestic product (GDP) growth of more than 8% in 2021 and which grew at an average rate of 10%/year during 1990-2004. Retail sales in June slowed to 3.1% year-on-year, compared to almost 13% in May. Annual consumer price inflation was flat in May, and prices of pork - Chinese diners' favored meat - actually dropped by 7.2%. It seems perverse to be worrying about deflation - a drop in the general price level of goods and services - in China while much of the West is still struggling with inflation, but if China sneezes the rest of the world may catch cold.

So what's going on? Should we be worried?

Gloom from the IMF

The background to the slowing Chinese economy is that the whole world is undergoing some profound changes; economic growth is proving more difficult to achieve. In July the International Monetary Fund (IMF) said the global GDP would this year slow to 3%; it will fall even more in "advanced" economies, to 1.5% and "remain subdued" at 1.4% in 2024. The euro area will "decelerate sharply"; global activity is "losing momentum" it said. The world appetite for Chinese goods will continue to be sluggish for the next couple of years. Compounding this is China's youth unemployment is more than 20%, a record high, the property market is in a slump, and domestic demand is very weak.

Some independent economists suggest that China is already in a deflationary spiral, in which the general level of prices falls. Deflation sounds like an ideal situation for an individual consumer but for the overall economy it is a serious problem. If consumers sense that deflation has set in, they will tend to put off purchases in the expectation that prices will fall even further. The Chinese central bank has cut key interest rates, hoping to stimulate the economy but without obvious success.Japan has been trapped in a deflationary spiral for 20 years; economic stagnation is a consequence.

In a centrally-controlled authoritarian system it's messengers who get punished. Thus the authorities are pressing local economists to avoid discussing deflation. Regulatory authorities in China have indicated to economists that positive reports about negative data are what is required right now. Deflation has become a taboo topic.

Self-fulfilling prophecy?

Consumers in China's biggest markets, the US and the EU, have been cutting back on their purchases as they struggle with inflation and tighter credit, and as suspicion of China's geopolitical ambitions set in.. This drop in purchases means for China falling prices, which has spilt over into falling profits. Falling profits inevitably will mean an unwillingness for investors to risk buying shares. Falling corporate profits and a reluctance to invest will eventually mean job losses. Debt will become more expensive. If gloom about the economic future takes a grip then it risks becoming a self-fulfilling prophecy.

From being the workshop of the world, China may be reduced to the corner store, a place to go when you run out of basics. Its massive resource of rare earth materials will continue to be in great demand by the West, but its slowing birth rate means it will be unable to remain a low-wage economy. According to Fidelity''s Asia economist, what happens in China will not stay in China - "China...is exporting disinflation." That sounds like good news for many countries, which are going through inflation. But the risk of contagion - its spread to others - is not good news. There is an enhanced risk of a global economic recession, given the round of higher interest rates in the US and Europe, The West counted on China's economic recovery to offset anemic growth in the EU and US but clearly that's not happening. The problems don't just date from the Covid-19 pandemic; since 2015 deposits in Chinese banks have soared, while private investment has fallen by two-thirds and private-sector consumption of durable goods is down by about a third since then. The absence of consumer demand, the preference of Chinese citizens to save rather than spend, understandable in an autocratic regime, is crippling the economy.

China is the world's biggest gold consumer and so far this year its gold demand remains strong. The first half of this year showed that gold demand was up 16% compared to the same period a year ago. The dominant price for gold s of course the US Dollar, which has lost around 99% of its purchasing power over the last century, while the gold price has increased some 100 times. The most savage instance of deflation is probably the Great Depression of the 1930s. A huge contraction in the supply of money and credit meant the purchasing power of the Dollar increased. The gold price was fixed at $20.67/ounce and convertible with the US Dollar. Prices for ordinary goods and services fell by 25% in the three years ending in 1932. Many people did not have many spare Dollars then - but those that did found their Dollars would buy more, not less.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.