As for China, it revealed last week that consumer prices were flat in June compared to a year earlier, while producer prices fell at the fastest pace since 2016.
This compares with the US inflation rate, which slowed to 3 percent (compared to 4 percent in May), compared to 9.1 percent in June last year (the highest in four decades at the time).
According to an analytical report published by the British “Financial Times” newspaper, developed economies were severely affected by the sharp rise in energy and food prices, after the war in Ukraine, while energy price controls in China protected them from the worst of these fluctuations.
But the country is now at risk of contraction due to lower consumer demand and private investment, as the economy emerges from strict controls against the COVID-19 virus.
The report of the British newspaper analyzes the details of the policies that China has pursued since 2020 and that led to the current situation, because, like other countries, China has sought to confront the negative economic effects of the epidemic by maintaining the adjustment of monetary and fiscal policy, as follows:
- In 2020, the government issued 1 trillion yuan ($140 billion) in bonds, ran a fiscal deficit of 3.6 percent of GDP, and cut interest rates by 30 basis points.
- In 2022, it channeled another 1.4 trillion yuan in “quasi-fiscal financing” through state banks, according to Citi Research. Local government bond issues were also allowed to increase, and interest rates were cut by another 20 basis points.
- Beijing’s fiscal stimulus has mostly been directed at areas such as infrastructure and corporate spending in the form of tax cuts, cuts in compulsory social security payments on salaries and other measures aimed at preventing job losses.
By contrast, the US has launched a much larger fiscal and monetary stimulus plan, with American consumers receiving a cut of the reward in direct payments and unemployment benefits. The United States and other Western countries also suffered from supply-side constraints as people left the workforce and supply chains were disrupted.
In China, there were fewer supply chain problems. Chinese citizens have been confined longer to their homes and their businesses have closed, leading to increased unemployment and severe damage to family budgets. The real estate collapse also affected commodity prices, leading to lower producer price inflation.
Chinese policies during and after the epidemic
At the same time, many local governments have emerged from the epidemic in debt. The private sector was left with excess capacity, sensing weak consumer demand, and an unwillingness to invest.
Dr. Samar Adel, a researcher in international economics, comments in exclusive statements to the “Sky News Arabia Economy” website, saying: “The policies that China pursued during the Corona pandemic and the strict “zero Covid” controls after that had a negative impact on the movement of economic activity, then The war in Ukraine came to affect supply chains and trade exchange, at a time when Beijing relies mainly on manufacturing and the high export base that drives economic activity, and thus the Chinese economy pays the tax of these factors combined.
She adds to these factors the continuing consequences of the US-Chinese escalation (the trade war between Washington and Beijing), explaining that despite the positive messages sent by US officials, the latest of whom is US Treasury Secretary Janet Yellen, upon her visit to China, President Joe Biden is waving more restrictions (. .) And this is reflected in many sectors, including the problems facing the Chinese economy in the technology sector in the context of the pressures it is exposed to from the United States and the West, and in a way that affects economic activity.
The researcher in the international economist points out the slowdown in consumption in China, according to the aforementioned data and policies, and in light of the pressures that Beijing has faced during the past three years since 2020, amid rising consumer concerns, and with reduced spending, which puts pressure on the economy and makes it threatened by a financial contraction.
The risk for Chinese policymakers is if the deflationary trend becomes entrenched in consumer and business expectations. Thus, companies will curb investment further as profits dry up, while consumers will spend less because they are concerned about their job security and further decline in property prices, according to the British newspaper report.
Real estate sector crisis
The same report indicates that there is evidence that the real estate sector – after stabilizing early in the year – is once again on a downward path (..).
In this context, Adel points out, in her interview with Sky News Arabia, that the real estate sector crisis that Beijing faced a few years ago, and while real estate assets are one of the pillars of the Chinese economy, it still casts a shadow over the scene, because when the crisis occurred Many companies exited with great indebtedness, and developers were affected extensively, which resulted in a shock to the Chinese economy, the consequences of which are still present.
Returning to the Financial Times report, analysts quoted their estimates regarding:
- Potential further weakness in consumer prices.
- Inflation is expected to pick up slightly in the coming months due to the lower base effect (inflation in the same period of the previous year).
- “Further easing of policy on housing and infrastructure will be critical to stabilizing aggregate demand,” Morgan Stanley analysts wrote in a research note.
Economic data
The latest official data showed that China’s economy grew at a subdued pace in the second quarter, although the annual figure was encouraging due to underlying stimulus, with overall momentum faltering quickly due to weak demand at home and abroad.
According to data issued by the National Bureau of Statistics, China’s gross domestic product grew by only 0.8 percent in the period from April to June, compared to the previous quarter, compared to analysts’ expectations in a Reuters poll, an increase of 0.5 percent, and compared to a growth of 2.2 percent that had been recorded in the first quarter of this year. .
- GDP for the second quarter 6.3 percent year on year (expectations 7.3 percent, first quarter 4.5 percent).
- GDP for the second quarter 0.8% qoq (2.2% in the first quarter, expectations at 0.5%).
- Industrial output for June 4.4% year on year (expected 2.6%, May 2.7%).
- Retail sales for June 3.1% yoy (expectations 3.2%, May 12.7%).
- Investment in fixed assets January-June 3.8% year on year (expectations 3.5%, 4% Jan-May).
- Real estate investment from January to June -7.9 percent year on year (from January to May -7.2 percent).
- January-June real estate sales by floor area -5.3% yoy (Jan-May -0.9%).
broad challenges
For his part, Professor of Economics, Advisor to the World Bank, Dr. Mahmoud Anbar, points to the state of uncertainty dominating the markets, which leads to the restriction of investments and spending (which in the Chinese case is clear in terms of slowing consumption and unwillingness to invest).
Although China did not enter a state classified as an economic recession, which often means recording a two-quarter recession, Anbar argues in exclusive statements to “Sky News Arabia Economy” that the global economy, in light of the repercussions of the war in Ukraine, is threatened by a rare case of inflationary stagnation, which is What drives the general state of uncertainty, which affects various economies around the world, which is evidenced by the remarkable decline in investments, according to the latest reports of the United Nations Conference on Trade and Development (UNCTAD), which indicates a decline in global foreign direct investment by 12 percent in 2022, to $1.3 trillion.
He refers to the group of factors related to China in particular, which impose broader pressure on the Chinese economy in light of the uncertainty prevailing in the global economy, the most important of which are related to the trade crisis that China faces with the United States, as well as the factors related to the Chinese economy and the policies followed, pointing to Beijing relies on a large part of its domestic product on exports, and it has been greatly affected by the recession that afflicts the world with the faltering supply chains and the stagnation of global trade, which poses broad challenges to the Chinese economy.
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