China’s fastest deflation in 15 years poses risks

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China is facing significant economic headwinds as consumer prices experience the fastest decline in 15 years which could impact investors around the world, the head of a leading advisory and fintech has warned.

The consumer price index in the world’s second-largest economy fell 0.8% year on year in January, according to official statistics released on Thursday, the fourth consecutive month of declines and the biggest contraction since 2009.

“The latest data suggests that deflation could be becoming entrenched in the world’s second largest economy and that raises red flags for investors globally,” said Nigel Green, the CEO of deVere Group.

“The impact can be expected to reverberate across various sectors, prompting a re-evaluation of investment strategies.”

He added that prolonged deflation in China poses a threat to its manufacturing and export sectors, key drivers of the nation’s economic growth, and sectors often favoured by international investors.

“The deflationary trend in China could also weigh heavily on commodities and industries dependent on natural resources. A slowdown in Chinese demand for raw materials may impact global commodity prices, affecting investors in sectors such as mining, energy, and agriculture,” Green said.

Decreased sales

“Companies relying on exports to China for their commodities may experience decreased sales, impacting global investors with exposure to these markets.”

In addition, those with stakes in Chinese tech companies and global technology funds could see diminished returns as these sectors face the possibility of reduced funding and a more challenging business environment, he added.

“Falling prices and reduced confidence may also lead to decreased demand for consumer goods, retail and housing and commercial properties as markets adjust to changing economic conditions.”

In an article this week for Asia Times, Green wrote that policies from Beijing will be crucial in pulling China out of the current situation.

The cumulative effect of three years of economic downturn, erasing a staggering $7 trln of value, “demands a departure from the smaller measures,” he noted.

“It’s time for Beijing to adopt bolder, ‘open-door,’ internationally minded, and transparent steps to reignite growth and restore confidence. At the core of Beijing’s revival strategy must be a commitment to openness and international collaboration.”

The deVere Group CEO concluded that, “as investors assess the challenges posed by China’s deflationary environment, it becomes imperative to reassess and potentially rebalance portfolios. Diversification across various sectors, risk management strategies, and a focus on stable assets are crucial considerations.”