Feb 14 / Victor Arduin

Macroeconomics Weekly Report - 2024 02 14

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China contributes to the slowdown in global inflation

  • Inflation has been one of the main challenges in the world economy over the last three years, but in the last year China has helped to alleviate this pressure.
  • With the devaluation of its currency and the fall in domestic prices resulting from the lack of consumer and investor confidence in the country, the world's second largest economy has spread its deflation globally.
  • However, the persistent deflation in its economy is beginning to pose risks for its economic growth, which could mean fewer commodity imports in the coming years.


After a long period of lockdown, a measure imposed to combat Covid-19, China began the process of reopening its economy in 2023. A year of recovery was expected in the world's second largest economy, where the return of economic activity would bring more consumption and growth, but this is not exactly what happened.

The Chinese economy is facing significant challenges. The real estate sector is weak, with less and less stimulus, youth unemployment has risen and the currency has depreciated sharply as a result of high interest rates in the world's major economies. However, one of the most significant challenges has been deflation.

Image 1: China - Consumer and Producer Inflation (%)

             Source: National Bureau of Statistics of China

Image 2:   China - Basic Interest Rates (%)

Source: PBoC

Chinese export prices falling

In recent years, China has attracted attention due to a less robust economic performance than that seen in recent decades. Despite registering lower growth, with a GDP expansion of 5.2% in 2023, the country still maintains its importance as a significant driver of the global markets. However, it is undeniable that there are significant challenges, such as inflation, which closed at -0.8% in January.

Consumer prices are falling at the fastest rate in 15 years, reflecting investors' lack of confidence in the Asian country's economy. With persistent deflation, the stock market has been devaluing, falling by more than -10% in 2023, as has its currency, which in recent months has depreciated against the euro and the dollar. If Chinese products were already cheaper due to internal deflation in the country, the currency devaluation makes them even more competitive. The combined effect of lower prices and a devalued exchange rate has contributed to global disinflation.

Image 3: China - Yuan Exchange Rate

Source: Refinitiv

In general, lower prices are welcome, but not when they spread deflation in an economy, as has been the case in China. The persistent deflation in the country is affecting economic growth. An example of this is that the IMF predicts growth of 4.6% in 2024, which could fall to 3.5%, and 2% in 2025.

In this sense, the country is expected to adopt stronger stimuli, both in its monetary policy, by cutting interest rates, and in fiscal policy, with stimuli aimed at sectors of the economy, especially real estate. Without economic support from Beijing, 2024 could become a more difficult year for commodities. With lower economic growth and a devalued currency, the country may import fewer inputs, which could affect emerging economies.

Image 4: China - Exports and Imports Year on Year in USD (%)

Source: China Customs

In Summary

Despite more modest economic growth in 2023, China continues to play a crucial role as an important driver of the global markets. Some sectors, such as electric car manufacturing, continue to thrive, as does the service sector, demonstrating the resilience and diversification of the Chinese economy.

Consumer prices in China are falling rapidly, reflecting a lack of confidence in the Asian country's economy. As long as deflation persists, there will be a significant risk to consumption and investment.

China is expected to implement more robust stimulus in 2024, both in its monetary policy, through interest rate cuts, and in fiscal policy, with a focus on specific sectors such as real estate.

Weekly Report — Macro

Written by Victor Arduin
Reviewed by Alef Dias


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