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The Darkening Outlook as China Experiences Deflation

After China ended its strict Covid measures in December, people expected a strong rebound in the economy. However, the country is now facing a series of challenges, including youth unemployment, a housing slump, stagnant spending, and even deflation.

This is a significant departure from the previous trend of continuous economic expansion and rising living standards. Business owners and consumers in China are losing confidence in the future, and they fear that the government does not have solutions to these problems.

Richard Li, the owner of an auto parts wholesale business, expressed his concerns: “The most terrifying thing is that everyone around me is at a loss of what to do next. I used to believe that our country would become better and better.”

In the first half of 2023, Mr. Li’s business revenue declined by 15% compared to the previous year. Other companies, including auto repair shops, have also been struggling due to reduced spending by consumers.

Mr. Li had to close two of his four stores, lay off employees, and cut back on expenses. He even tried to sell an apartment he had bought as an investment, but there has been little interest, even after reducing the price.

It has become difficult for people like Mr. Li to rely on the Chinese government for accurate information about the economy. The government has been withholding data that it used to release regularly. For example, it stopped sharing the unemployment rate for young people after it reached a high of 21.3% in June.

Official data that was released for July showed a grim situation. Consumer prices in China declined for the first time in over two years. The amount of new renminbi loans issued by Chinese banks decreased by 89% compared to June and was half the amount from the previous year. Housing sales also fell by 6.5% in the first seven months of the year, which is alarming considering that a significant portion of household assets in China are tied to real estate.

The prospect of deflation is causing anxiety among the population. People are already saving more and spending less due to fear about job security and the survival of their businesses. This will further push the economy into a deflationary spiral.

Entrepreneurs are also hesitant to take out loans due to the uncertainty of the situation. Mark Fu, the founder of a financial advisory firm, has seen his business thrive during the pandemic as wealthy Chinese seek to move their assets outside of China. However, he is reluctant to take on debt and has even reduced his staff.

The overall mood in China is becoming increasingly bleak. People struggle to see a way out of this downward spiral. Many believe that the root of these troubles lies in the ideology of Xi Jinping, the paramount leader of China, who appears to have a negative view of the private sector and has dismantled elements of the market economy.

Some individuals are even considering leaving the country for better opportunities elsewhere. Andy Wang, for example, quit his job at a bank to prepare for graduate school in Australia. He feels that the corrective ability of China has been lost.

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