The weakest price environment in 25 years will intensify “Japanization” speculation, much to Beijing’s annoyance.
China is suffering through its longest streak of falling consumer prices since 1999 as economic growth underwhelms and stocks crater.
It’s a far cry from the way Chinese leader Xi Jinping thought Asia’s biggest economy would enter 2024. For all last year’s challenges—including an epic property crisis and record youth unemployment—Beijing exuded great confidence that momentum would return.
On the surface, Xi could point to news China grew an annualized 5.2% last year to try to make that case. Below it, though, deflationary pressures are festering in alarming ways.
At a minimum, the weakest price environment in 25 years will intensify “Japanization” speculation, much to Beijing’s annoyance. Yet the deflationary forces plaguing China also offer insights into why the stock market is stumbling.
Last week, Tokyo’s stock exchange surpassed Shanghai’s as Asia’s biggest by market capitalization. India’s much-watched valuation premium over China reached a record as international investors flee yuan-denominated assets.
There are many causes for China’s equity market reckoning. They include worries about the property sector, weak household spending, disappointment the government isn’t doing more to reform the financial system and the central bank’s reluctance to cut interest rates.
But the idea that Asia’s biggest economy might be sliding into a prolonged economic funk, Japan-style, is the background music playing in trading across Asia. And the fact economists are looking at events in Beijing through a 1999-like frame adds to frustration that China’s government is sleepwalking into the ultimate self-inflicted policy wound.
In Asia, 1999 stirs a variety of memories. It was then, for example, that the Bank of Japan slashed rates to zero, a first for a Group of Seven nation.
