The country should stimulate consumption with spending on education, healthcare and public housing (CHETAN AHYA, 12/11/23, Financial Times)

Its gross domestic product deflator — the broadest measure of prices, taking in all goods and services of a country — is at minus 1.4 per cent and has contracted for two consecutive quarters. Consequently, China’s nominal GDP growth was just 3.5 per cent in the third quarter, much lower than the 6.4 per cent of the US.

A deflationary backdrop poses a few challenges. First, real rates after taking into account deflation will rise, increasing the burden on debtors. Second, even as debt growth slows, it will probably remain higher than nominal GDP growth. And so debt-to-GDP ratios will continue to climb. More crucially, a weaker GDP deflator negatively affects the trends in corporate revenues and profits. If deflation continues to eat into these, companies will cut wage growth, creating a vicious “loop” of even weaker aggregate demand and deflationary pressures.

These issues are particularly challenging in China’s context, considering that it is also facing elevated debt ratios and weakening demographic trends. Along with deflation, these factors combine to present a challenge to China we term the “3 Ds”.

The deflationary pressures in China stem from the deleveraging of the balance sheets of the property sector and local governments. When you consider that the combined debt on these balance sheets accounts for about 100 per cent of GDP, it is hardly a surprise that demand and price pressures are as weak as they have been.