China's deflationary effect: benefits for the global economy - Bloomberg

The economic turmoil in China is having an impact on global financial markets. However, some financial experts argue that this situation can also bring positive results. This was reported by Bloomberg.

Falling prices in the world's second-largest economy are likely to reduce costs at all levels due to China's status as a "global factory." Representatives of EdenTree Investment Management and Gama Asset Management SA point out that weakening inflation may allow central banks to refrain from further interest rate hikes and possibly even move to an easing policy to support the slowdown.

The prospect of lower global price pressures could be a positive aspect of deflation in China, as the country's economy is actively trying to regain its footing. Inflation is expected to remain subdued as the decline in the real estate market and problems in China's shadow banking sector limit consumer and corporate spending and investment.

"China's weakness may trigger a tightening of monetary policy. This could also lead to a decrease in demand for commodities, reduce inflationary pressures, and provide the Western economy with the opportunity to grow more actively," said Christopher Hearns, portfolio manager at EdenTree Investment.

After the pandemic, inflation in the United States and other countries increased significantly, which led to a decrease in consumer purchasing power and forced central banks to raise interest rates. China's predicament stemmed from a number of factors, including a prolonged real estate slump that has dented confidence and reduced spending. In 2023, prices for Chinese goods for the United States decreased monthly.

"On the positive side, a little deflation and slow growth in China could help to further reduce inflation in other parts of the world," said Rajiv De Mello, global macro portfolio manager at Gama Asset Management. However, a widening downturn in China could also weigh on Asia and Europe, he added.

De Mello told Bloomberg that the export of deflation from China could be positive for bond and asset holders in emerging markets.

Of course, the impact of Chinese deflation on the world's largest consumer, the United States, and other trading partners may be limited and temporary. The supply of goods from China to the United States has decreased, and Russia's conflict with Ukraine is driving up prices for certain commodities, such as oil.

Depending on which downward growth trajectory China chooses, the US economy and the Federal Reserve's plans may be affected. This could lead to the Fed cutting rates earlier than expected.

In the future, additional measures by the Chinese authorities may help to stop the economic downturn and mitigate the price situation. "The weakness of the Chinese economy and apparent deflation is one of the obstacles to global inflation," said Gary Dugan, Chief Investment Officer at Dalma Capital Management.