Global investors expect falling prices in China to push down inflation rates worldwide this year, as excess capacity in its slowing economy prompts Chinese exporters to cut prices on goods they sell abroad.
Prices of Chinese exports have been falling at their fastest rate since the 2008 financial crisis, indicating the world’s largest exporter is starting to send deflation outward to countries that have been battling high inflation.
“China will be exporting deflation to the rest of the world, and you will find various countries dealing with the fact that China has built up overcapacity,” said Chetan Sehgal, lead portfolio manager at Templeton Emerging Markets Investment Trust, a UK-listed fund.
China’s consumer prices fell at the fastest annual rate in 15 years in January, losing 0.8 per cent, while the country’s producer price index dropped 2.5 per cent year on year. Few economists expect developed economies to record similar outright falls in prices, but many think Chinese deflation could have a significant impact in emerging markets, particularly those with major trading relationships with Beijing.
Line chart of Annual % change showing Chinese export prices are falling at a rate not seen since the last financial crisis
Citigroup analysts said this week that falling prices in China could help to hasten moves by central banks in emerging markets to cut interest rates this year, particularly in countries that consume relatively large shares of Chinese goods.“We as investors are only just starting to connect the dots” on how falling prices imported from China might play out across markets, said Luis Costa, global head of emerging markets sovereign debt strategy at Citigroup. “The question is the magnitude.”
Low-cost Chinese-made goods have been a feature of global trade since Beijing joined the WTO in 2001. But weak domestic demand as a result of China’s prolonged property bust and a weaker renminbi are leading investors to forecast that exports could be an especially powerful force this year.
The prospect of China exporting deflation matters for developing economies because “potentially, a big Chinese export boom in 2024 will lead to sustained demand for Latin American, African, Kazakh or Indonesian commodities”, said Charles Robertson, head of macro strategy at FIM Partners. “Chinese deflation in manufactured goods may still allow a little inflation in commodities.”
Not all economists believe that deflationary forces coming out of China will have a significant impact on global prices.
Helen Qiao and Miao Ouyang, Bank of America economists, said that Chinese export prices would be unlikely to influence significantly consumer prices in advanced economies.
“For the US, we estimate the share of Chinese imports in the total US goods consumption is less than 5 per cent — and goods account for approximately 40 per cent of the US CPI basket,” they said.
Stephen Stanley, chief US economist at Santander Bank, said that any impact was likely to be small. “The biggest deflationary force in goods prices here of late has been used vehicles, which has nothing to do with China,” he said.
But some economists think that US imports from China are being undercounted, which could make the impact on prices greater than it might appear. In recent years for example, China’s trade data has been indicating that it exports tens of billions dollars more than the US assesses it imports, Brad Setser, a senior fellow at the Council on Foreign Relations, has noted.
Line chart of China to US trade, sum over previous 12 months ($bn) showing US imports from China may be being undercounted
At the same time, cheaper Chinese exports will intensify complaints among western manufacturers about unfair competition. Chinese exports still face obstacles this year because they are “vulnerable to greater trade protectionism, with China’s recent gains in global market share starting to face growing pushback overseas”, said Capital Economics analysts on Thursday.
“The most obvious headline threat is to developed markets — because China’s moving up the value-added curve into high-end manufacturing,” said Robertson.
BYD, China’s biggest carmaker, recently announced price cuts of between 5 and 15 per cent for its electric vehicles in Germany, after Mercedes-Benz warned late last year that its profits were being hit by a “brutal” price war in electric vehicles.
Nearly every other manufacturing company in Germany surveyed by the Bundesbank in the past year relied on Chinese supplies for critical intermediate inputs whether directly or indirectly, the central bank said in a report last month.
“China spent 20 years destroying emerging-market competitors in the manufacturing space, or at least squeezing them out of global markets. Now it’s threatening to do the same to advanced economies’ manufacturers,” added Robertson.
The US and EU are facing a difficult choice, Setser said, between policies to “de-risk” import reliance on China, and the economic forces that are driving cheap Chinese supply. But “in much of the rest of the world, the choice is simple”, he added. “If China is selling high quality — or acceptable quality — products at low prices, they are going to buy them.”