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The Darkening Outlook as China Experiences Deflation

When the Chinese government ended its strict Covid measures in December, many Chinese expected a strong rebound in demand. However, eight months later, China is facing a series of challenges, including record youth unemployment, a significant decline in the housing market, stagnant consumer spending, and even deflation.

This situation has come as a shock to many Chinese citizens who were accustomed to a constantly expanding economy and improving living standards. Now, they are dealing with slowing businesses and diminishing personal wealth.

I interviewed several business owners and consumers, as I have done for many years, and it is clear that their confidence in the economy and the country’s future is at an all-time low. Any hope for a rebound has been extinguished, and they worry that this may be the beginning of a much bigger problem. Additionally, there is concern that the government lacks effective solutions to address these issues.

Richard Li, the owner of an auto parts wholesale business, expressed his concern, saying, “The most terrifying thing is that everyone around me is at a loss regarding what to do next. I used to believe that our country would continue to improve.”

In the first half of 2023, Mr. Li’s business saw a 15% drop in revenue compared to the previous year when his city, along with millions of others, was put under lockdown for several weeks.

He discovered that other companies in his industry were also struggling. Some of his clients, such as auto repair shops, had to close down due to reduced consumer spending.

As a result, Mr. Li had to close two of his four stores, lay off two-thirds of his employees, and stop investing in new products. He also had to cut back on dining out and socializing with friends. To make ends meet, he even tried to sell an apartment he purchased in 2020 as an investment. However, there has been little interest, even after lowering the price from $500,000 to $400,000.

It has become increasingly challenging for people like Mr. Li to rely on the Chinese government for accurate economic information. The government has been withholding data that it used to release regularly. Last week, it even stopped sharing the unemployment rate for young people after it reached a high of 21.3% in June.

However, the government did release some official data for July, and it painted a bleak picture. Consumer prices in China dropped for the first time in over two years. Chinese banks issued $47.5 billion of new loans, a significant decrease of 89% compared to June and half the amount from the previous year. Housing sales also fell by 6.5% in the first seven months of the year, following a nearly 25% decline last year. This is particularly concerning considering that three-fifths of household assets in China are tied to real estate.

The anxiety in the country is so high that people are resorting to posting talismans on social media platforms in an attempt to sell their houses.

China has entered a state of deflation after the government’s strict “zero Covid” policy significantly suppressed consumption and business activity last year. Chenggang Xu, an economist at Stanford University, explained the pernicious nature of deflation, stating that it can lead to a cycle of people expecting prices to further decrease and therefore delaying purchases. This, in turn, leads to increased fear and anxiety, causing people to save more and spend less, which further deepens the deflationary trap.

Given the already high levels of anxiety, people are already reducing their spending and increasing their savings.

Cob Liu, the founder of an education start-up, stated that his revenue has remained flat this year, a significant change for a company that used to grow at a rate of 40% annually. Despite having around $1.5 million in cash, he is determined to keep his monthly spending at around $800, with half of that going towards rent.

Mark Fu, the founder of a financial advisory firm, has experienced a growth in business this year. However, even he is reluctant to take out loans due to the uncertainty of the current economic environment. Instead of expanding his business, he has reduced his staff through attrition. He expressed his horror at the government’s clampdown on various industries during the pandemic, saying that he used to believe in the reward of hard work, but now fears that running his business effectively is no longer the most important factor.

The pervasive pessimism on social media has led to a call for the suppression of posts that speculate about future troubles. The government argues that such rumors cause market instability.

This declining outlook has left many people in despair, as they struggle to see a way out of China’s downward spiral. They believe that the root cause of these issues lies in the ideology of Xi Jinping, China’s paramount leader, who seems to have a distaste for the private sector and has dismantled elements of the market economy that previously drove China’s economic success.

Andy Wang, a former bank employee who plans to apply for graduate school in Australia, expressed his pessimism about the future. He stated, “I can’t see any way to make money in this country. I’m not even sure if I can maintain my current living standard. I could only strive for survival.”

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