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Chinese Economics Thread
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Deflation bad, small inflation is good is economic 101. You can read any textbook. There is an attempt to justify current economic troubles in China as somehow by saying current deflation is good for poor people. Here is the bottomline, it is not good for China. Its economy is in a bad shape.
Now the next question is why they are not fixing the deflation problem when they can easily loosen monetary policy and print more money? I think they are being too conservative and risk-averse Just like extended zero-covid policy.
Now the next question is why they are not fixing the deflation problem when they can easily loosen monetary policy and print more money? I think they are being too conservative and risk-averse Just like extended zero-covid policy.
Just cause ChatGPT tells you what you expect to hear, what economics teachers have been telling us, doesn’t mean it’s true. DeepSeek says deflation can cause debt burden to be reduced not increased. Think different!
Sorry if this is is AI but it’s a great explanation and contradicts the accepted wisdom which I think is really valuable here, too long have we heard this nonsense about deflation being bad. There is always a deeper explanation, let’s graduate from economics 101.How Deflation Reduces the Real Burden of Debt
Deflation can impact the real burden of debt in several ways, primarily by altering the relationship between nominal debt levels and the purchasing power of money. Here’s how it works:
Increased Value of Money
- Higher Purchasing Power: In a deflationary environment, the value of money increases because prices for goods and services decline. This means that the same amount of money can buy more than it could before.
- Fixed Nominal Payments: Most debts are structured with fixed nominal payments. If prices fall, the real value of these payments increases, making it easier for borrowers to repay their debts with money that has greater purchasing power.
Real Debt Burden Decreases
- Real Value of Debt: As prices decrease, the real value of existing debt (the amount owed adjusted for inflation or deflation) effectively increases. However, since borrowers are paying back their loans with money that is worth more, the burden of repaying that debt can feel lighter in terms of purchasing power.
- Easier Repayment: Borrowers may find it easier to manage their debt obligations because their income, if it remains stable or increases, can stretch further in a deflationary context.
Impact on Interest Rates
- Lower Interest Rates: Deflation often leads to lower interest rates, which can reduce the cost of borrowing. If borrowers can refinance their debts at lower rates, this can further alleviate the burden of debt.
- Real Interest Rates: In a deflationary environment, even if nominal interest rates are low, the real interest rate (nominal rate minus inflation) can be high. This can create a situation where the cost of borrowing is effectively reduced in real terms.
Economic Adjustments
While deflation can reduce the real burden of debt, it’s important to note that prolonged deflation can also lead to economic challenges, such as decreased consumer spending and investment, which can ultimately affect borrowers' ability to repay their debts. Balancing these dynamics is crucial for maintaining economic health.
- Encouragement to Pay Down Debt: As the real burden of debt decreases, borrowers may be more inclined to pay down their debts rather than default, leading to a healthier financial environment overall.
- Increased Financial Stability: With a reduced real burden of debt, individuals and businesses may experience improved financial stability, which can contribute to overall economic recovery and growth.
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Because core CPI increased. Main decrease is energy.
Companies usually lose money until the price falls to the "cash cost", which is already a big loss.
Competition in China is so fierce that it's the only place I've seen prices below the cash cost.
There's no justification for this madness. The fact that the political leadership is already expressing its discontent is a good sign.
I hope that the political leadership and industrial leaders can find a way to stop this spirit of suicidal self-destruction in which everyone believes they can be the only survivor.
I think recognizing the problem is already a big step, and it gives me hope for healthier industrial development in China.
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"China's President Xi Jinping on Tuesday vowed to tighten oversight of aggressive price-cutting by domestic firms, amid growing concerns over persistent deflation.
According to state news agency Xinhua, overcapacity and price wars among Chinese manufacturers affect consumer behavior and risk deepening deflation, which could derail efforts to stabilize the economy.
"Enterprises engaging in disorderly low-price competition must be regulated under laws and regulations," said a statement from the Central Financial and Economic Affairs Commission, chaired by Xi."
Competition in China is so fierce that it's the only place I've seen prices below the cash cost.
There's no justification for this madness. The fact that the political leadership is already expressing its discontent is a good sign.
I hope that the political leadership and industrial leaders can find a way to stop this spirit of suicidal self-destruction in which everyone believes they can be the only survivor.
I think recognizing the problem is already a big step, and it gives me hope for healthier industrial development in China.
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"China's President Xi Jinping on Tuesday vowed to tighten oversight of aggressive price-cutting by domestic firms, amid growing concerns over persistent deflation.
According to state news agency Xinhua, overcapacity and price wars among Chinese manufacturers affect consumer behavior and risk deepening deflation, which could derail efforts to stabilize the economy.
"Enterprises engaging in disorderly low-price competition must be regulated under laws and regulations," said a statement from the Central Financial and Economic Affairs Commission, chaired by Xi."
I dont think thats the point i was trying to make. We are talking about a situation where companies are engaged in such price competition that even the meagre profit margin any company in the world needs to keep going are affected more and more. Some company are even selling at cost price of the product with zero profit margins(some even at a loss) just to stay competitive and remain in the market, this is not sustainable since it even forces the most competitive and innovative companies to be left with no choice than to follow this trend thus engaging in a situation which is not productive for the countries industries, something which is not sustainable.
There is a very good reason the Chinese government is finally hitting a hand on the table for companies to stop such unsustaible price competition. Since its gotten to the point that companies are more and more focused on competing on price for the most part to the detriment of other sectors.
The chinese government is not stupid to call for such practices to stop. Do you think the CCP is not happy to have prices of all goods as cheap as possible for Chinese people, even if Chinese companies are making zero profits? Of course the party would love that in an ideal world where it doesnt affect the producers, however they know the effects won't be good for the country's industrial sector in the long term since its not sustainable way to run an industry. chinas leader have called it "disorderly competition/involution" and “ rat race-style’ competition for a reason. They have called for companies to focus more on improving product quality than only low price to compete..
I agree with the chinese government. There should be a minimum threshold were prices should stop being lowered, when it eats on companies profits to the point where companies think the only way they can remain in the market is by selling at a loss IRRESPECTIVE OF HOW GREAT AND BETTER THEIR PRODUCT IS RELATIVE TO THEIR COMPETITION then it isn't a good model . There should be a mininun level og inflation(not too high not to low) so there needs to be a middle point where both consumers and producers are doing well. Hence the reason the government is obliged to step in like they are doing now. Im sure they have analysed and noticed this trend as well. They know the country economy and state better thsn you and me, so i believe they are calling for this practice to stop for a good reason. So you shoulf trust them nore on this .
Deflationary pressures have led Chinese authorities to address overcapacity in key sectors, but the latest round of industrial restructuring appears to be a watered-down version of the sweeping supply-side reforms launched a decade ago, which were instrumental in ending a deflationary spiral.
Current "anti-devolution" policy measures—aimed at curbing disorderly competition in sectors such as the automobile industry—are expected to begin raising the annual PPI starting in August.
The obvious macroeconomic response to deflation is to boost aggregate demand, encouraging households to increase consumption. Investment in this situation will only tend to increase overcapacity.
Rather than accept this macroeconomic recommendation, the Chinese government has responded to the growing signs of deflation with a misleading narrative about the need to regulate excessive competition. The clearest example of such "excessive" competition, especially for journalistic commentary—here the term "hook" is truly appropriate—is found in the Chinese electric vehicle industry. BYD, a world leader, recently surprised its competitors with the introduction of a new entry-level model, the Seagull, to which it is applying unprecedented price discounts.
Containing BYD's efforts to crush competition would not eliminate the deflationary risk in the Chinese economy. However, it is equally clear that for deflation to occur, companies must lower prices; therefore, to prevent deflation, companies must be convinced that they do not need to continue to reduce prices.
From a macroeconomic policy perspective, the question is how to ensure sufficient aggregate demand so that the enormous productive potential of new technologies does not become a curse, but rather a means of driving sustainable economic growth.