China’s economy is facing a new problem as the prices of consumer goods have fallen below normal for the first time in the last two years. The consumer index, which measures inflation, has decreased by 0.3% in the last month compared to the year-ago situation. This deflation occurs when there is less demand for goods in the market, either because production is higher than needed or because consumers do not want to spend money. Experts believe that there is pressure on China to try to increase demand in the market and bring stability to the domestic market.
China imposed strict restrictions in 2020 to combat the COVID-19 epidemic. As the world came out of the pandemic, China’s economy struggled with the crisis. The supply chain had come to a standstill due to the pandemic, and China’s domestic market almost came to a standstill. At the international level, some countries, including America, were talking about breaking trade relations with China.
In July 2023, China’s exports decreased by 14.5% and imports fell by 12.5% compared to July last year. Local governments in China are saddled with debt, regulators are trying to crack down on companies to prevent corruption, and youth unemployment is at record levels. Some experts believe these figures are cause for concern. If the situation continues for some time, China’s economic growth rate may be lower this year. The expenditure in the country is already low, due to which production may also decrease, which may also increase unemployment. However, at present, China is facing a lot of upheaval at the domestic level as well. Its real estate market has been troubled for some time now, and the government is trying to revive the sector.
China’s near-constant growth rate fell sharply in 2020 after the COVID-19 epidemic and stalled at 2.2 from 6.0 a year ago. After this, its economy boomed and reached 8.4 in 2021. According to the World Bank, due to the decline in both imports and exports, the country’s growth rate came down to 3, which was the lowest since 1976 (except for the year of the COVID-19 epidemic).
In the last 26 years, both imports and exports between India and China have been increasing continuously. In the last 26 years, both imports from China and exports to China have continued to grow at a rate of about 15.5% annually, while imports to China have continued to register an annual growth rate of about 16.6%. In 2021, India imported $94.1 billion from China, while exports to China stood at $23.1 billion. By 2023, this import-export relationship decreased until May 2023, when India imported $9.5 billion from China while exports remained at $1.58 billion.
Experts say that due to falling prices, challenges like low growth rates are arising in China. The Chinese government repeatedly indicates that the economy is under control, but some experts argue that it has not increased economic growth. There is no special pill to increase inflation, and the government must use a mixture of measures like increasing government expenditure and reducing taxes in its economic policy. China is going towards recession, and the second is whether China did this deliberately under the policy.
In 1978, the Chinese government introduced the ‘Great Circulation’ policy, which aimed to make the economy export-oriented. However, during the lockdown situation, countries started focusing on their economies. China has understood that an export-oriented economy is not enough and that it must also focus on the domestic market. Lower prices will make goods cheaper for consumers, increasing domestic consumption. If domestic consumption stops growing, deflation is an effective way to deal with it. China’s central bank (the People’s Bank of China) has shrugged off these concerns, expecting the consumer index to rise again after a low in July. The bank has said that the policies implemented have started making an impact, and the government needs to show patience and have faith that the economy will stabilize.
The key issue is whether the government can win over the confidence of the private sector, causing consumers to spend instead of saving, business investments to increase, and the economy to kick off. The government needs to take effective steps, such as tax cuts, to control the deflationary situation. If the government can control the situation by March 2024, the economy will be back on track. Before this, domestic consumption will increase, which will affect production and reduce unemployment. However, if the government cannot control the situation, it will not only increase the difficulties for China but also worsen the situation for countries that import from China.
China’s making its production cheaper will affect companies in other countries, as many countries are trying to end their production in China and move it to other countries. America has been ahead in this regard, with President Donald Trump urging companies to leave China. China also knows that many countries do not want to see it as a centre of production, so it wants to reduce the cost of production in China so that others can increase production costs within the country. Instead, importing from China would be a better option.
India, which has been dependent on China for imports in the past, faces a challenge as there is no free trade agreement between India and China. RCEP countries will get cheap goods from them, and India can get these goods from them. India also has a trade agreement with ASEAN countries and a free trade agreement with China, which could help it change import rules and reduce its import deficit.