China slows down

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Ethan Wu (0:38)

Thank Pushkin, it's never a good sign when your country stops publishing bad economic data, but this is in fact what is happening in China. They just today stopped publishing the very high youth unemployment rate on the same day that the Central Bank did an emergency unexpected rate cut. This is obviously not good news. And it's also just new. People are used to thinking of China as this fast growing behemoth, it's taken over the world, it's surpassing the US, but that's not happening. China is slowing down.

Today on the show, we ask, how bad is it?

This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu here in the New York studio, joined by economic sputtering expert, Robin Wigglesworth.

Robin Wigglesworth (1:26)

Hey Ethan, how's it going?

Ethan Wu (1:27)

Robin is an avid watcher of economy struggling of all kinds, including China, but not just China.

Robin Wigglesworth (1:33)

No, no, I mean, some people like to go to watch football games, some people do some pottery or carpentry. I love sovereign debt crises, countries hitting a bad patch. It's my hobby, as it were.

Ethan Wu (1:44)

Yes. Well, then you are the perfect guest to talk about the sputtering the Chinese are experiencing. And Robin, I thought we could do this by talking about three different indicators that kind of capture the Chinese slowdown, which some are even calling a recession, whether or not that's the right terminology.

And the three are inflation, exports and property sales. And I think each of these sort of speak to a different chunk of the Chinese economy that are going wrong for reasons of their own. And then together, they kind of paint this picture of the Chinese economic machine stalling. So just to start with inflation, right, the consumer price index for July in China came in at negative zero point three percent compared to the last year.

Prices are falling. It's entered deflationary territory. And before we get into kind of what's going on with inflation, maybe we should talk about why deflation is a bad thing from first principles.

Robin Wigglesworth (2:35)

Yeah, it's a good idea because for a lot of people, deflation sounds like an unambiguously good thing. Prices are falling. You know, I can afford to buy more stuff. The problem is that deflation is usually a symptom of something very bad, which is that people are getting poorer. You can't afford to pay so much that people have to cut their prices.

And also, if it becomes entrenched, it becomes hugely problematic because the price of your debts usually aren't falling. They're fixed. Like if I borrow a million bucks and I'm making less money from selling my goods, my loan isn't going down, but everything I earn is going down. So that's why you find these deflationary spirals. It's what's happened in the United States in the 30s. It's what happened in Japan more recently.

And they can be very, very, very hard to break. So deflation is kind of the ultimate bugbear for any central bank governor out in the world.

Ethan Wu (3:29)

Yeah. And I think just to boil that down into one line, the problem with deflation is nobody wants to spend when there's deflation. Because prices are going down, you got to repay your debts for all these various reasons. It gives a disincentive to spending. And so the whole economy is just sort of stuck.

And I think the deflation we're seeing now in China, a big reason for it is the just utter lack of consumer confidence. You can sympathize with what Chinese consumers are going through. They've just been through, I mean, this very serious scrape with economic precarity during zero COVID, where people in the largest Chinese cities could not get access to basic food and medicine. It's just, I think the Chinese economic future is very uncertain. And there's also not a very robust safety net in this country. This is a place where the savings rate is very high, because there's not a lot of government provision of kind of basic services. You have to protect yourself and your family by saving more.

And without some kind of clarity about where the economy is going, and if things are going to be all right, people are holding back for now on consumption.