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China Gripped by Deflation, Making Desperate Economic Moves: China’s Producer Price Index, measuring factory-gate prices, fell in November year-on-year for the 26th straight month.

The gross domestic product deflator, a broader gauge of prices across the nation, has been in negative territory for six straight calendar quarters, the longest period this century.

The Consumer Price Index last month showed a 0.2% rise over the same period last year, well below the country’s 3% target. 

China is gripped by deflation, an economy-killer. Lower prices are putting businesses out of business. And when people expect prices to drop, they hold off purchases, further aggravating the slowdown.

Official reports of gross domestic product show robust growth. The National Bureau of Statistics reported that China’s economy grew 4.6% in the third calendar quarter, not far below the country’s target of “around 5%” for the year. 

Han Wenxiu, deputy director of China’s Central Financial and Economic Affairs Commission, over the weekend said the country would meet its annual target.

In reality, China appears to be hovering about 0%, perhaps a little above or maybe even a little below. Beijing reported 5.2% growth of gross domestic product for 2023. The respected Rhodium Group, however, pegged growth at “more like 1.5%.” 

Since then, there has been a noticeable deterioration in the economy, even in official reports. A prominent Chinese economist, Gao Shanwen, this month said data discrepancies suggest China has been overstating GDP. Gao believes the country has been growing at about a 2% pace.

Even if China were growing at the reported figure, it would not be expanding fast enough to service debt. As a practical matter, China is now having its long-delayed 2008 crisis. In 2008, Communist Party General Secretary Hu Jintao and Premier Wen Jiabao decided to overpower trends and embark on what is undoubtedly the biggest peacetime stimulus program ever. Their building binge created double-digit growth as governments at all levels borrowed as fast as they could. 

Now, debt-fueled stimulus has exhausted itself. According to Michael Pettis of Peking University and the Carnegie Endowment for International Peace, the country in the second quarter of this year produced one yuan of GDP growth for each 4.2 yuan it had spent. The figure in the first quarter was one yuan of growth for every 10.8 yuan expended. 

As a result of overspending, China’s total-country-debt-to-GDP ratio is, according to my estimate, around 350%, but it could be as high as 400%. No one knows, however, because there is so much “hidden debt”—off-the-books local government debt is estimated to be as much as $11 trillion—and because, as Gao Shanwen believes, Beijing has been issuing inflated GDP statistics. 

A debt crisis is coming, and it will be the biggest in decades. 

So what is Beijing’s plan to head off catastrophe? The Party’s Political Bureau, better known as the Politburo, met on the 9th of this month and announced the country would adopt “moderately loose monetary policies,” a change from the “prudent” policy that had been in place for the previous 14 years. 

So to deal with a possible debt crisis, China’s leadership has decided to take on more debt. That maneuver risks triggering rapid failure. 

China has been able to postpone failure because of its strict currency controls. The renminbi, the formal name of the Chinese currency, is not convertible on the capital account. It is convertible on the current account, but sometimes, as a practical matter, outbound current account transfers are not permitted. Despite the rules, Chinese parties have used various stratagems to get money out. When they do that, the yuan falls.

The currency is now falling. The Politburo this month essentially confirmed it would allow the renminbi to weaken. Its post-meeting comments did not include stock language calling for a “basically stable yuan.” This phrase, last used in July, was not included in September. In any event, the currency has noticeably lost ground against the U.S. dollar since early November. 

A weaker yuan would be good for Chinese exports—Xi Jinping’s only plan to rescue the economy is with overseas sales—but a sliding currency risks other countries either weakening their currencies to maintain their competitive position or raising tariff walls. Even countries in what Beijing likes to call the “Global South” are putting up tariff barriers on Chinese goods.

Beijing’s new stimulus plan is, in reality, its old plan. “You know how they define ‘insanity,’ doing the same thing and expecting a different result?” Anne Stevenson-Yang of J Capital Research asks. 

Chinese President Xi Jinping. Image Credit: CCP.

China’s Central Economic Work Conference, which met Wednesday and Thursday, confirmed the Politburo decisions, so it’s clear that the Communist Party is taking China in the wrong directions. The regime announced goals to increase consumption—China’s technocrats always say this because they know what everyone wants to hear—but their plans will actually increase investment. Increasing investment undermines consumption by steering resources away from ordinary households. 

In short, China’s economic planners know what to say and know what to do, but they simply cannot do it in the confines of their political system. Xi Jinping is continuing to favor investment because he wants to continue building his war machine, he does not want to empower ordinary citizens by putting cash in their hands, and he does not want to take on core Communist Party constituencies.

Xi’s plan will lead to, among other things, worsening deflation.

The regime, however, seems unconcerned. “The goal is to keep the centrally owned banks from defaulting,” says Stevenson-Yang. “No one in the Communist Party thinks about the actual people of China.”

About the Author: Gordon G. Chang 

Gordon G. Chang is the author of Plan Red: China’s Project to Destroy America and The Coming Collapse of China. Follow him on X @GordonGChang. Chang is a 19FortyFive Contributing Editor. You can follow home on X: @GordonGChang.