Economic data has just been released, and two core indicators of it have raised widespread concern. China's core data for June has just been released, and the two core data that measure whether the economy is deflation are very worrying. The CPI, which represents the level of inflation, increased by 0.00%, which means that most people are relatively pessimistic about the future economy and have begun to pay more attention to the consumption of food and clothing. This trend is confirmed by the surge in the performance of cheap e-commerce platforms such as Duoduo, while the decline in the performance of other e-commerce platforms has cast more shadows over this phenomenon.
At the same time, the decline in the PPI, which represents the Producer Price Index, continued to widen, reaching a staggering 5.4%. This shows that the upstream and downstream demand for industrial products is insufficient, and the market has entered a miserable price war. However, both the CPI and PPI fell at the same time, which is not common in economic theory. Usually, when a country continuously over-issues money to stimulate the economy, consumption desire rises, and rising prices become the norm for inflation. However, China issued an excess of 28 trillion yuan of currency in 2022, and continued to overissue money to stimulate the economy from January to June this year, but all this did not stimulate domestic consumption desire, but led to a further contraction of consumption, and the production of industrial enterprises also further declined.
There are three main reasons for this phenomenon. First, the problem of asset shortages is becoming more serious in China. Attractive returns on investment are difficult for almost all industries, and bank credit has become difficult because economic growth is already much lower than bank lending rates. Second, the monetary transmission mechanism has been blocked. China's economy mainly relies on investment to drive development, and the central bank injects funds into the government and state-owned enterprises for infrastructure projects, and then drives the real estate market through investment, eventually affecting various industrial chains. However, now after the funds arrive in the real estate market, they stagnate and cannot be transmitted downward, resulting in poor overall money circulation and a downturn in the consumer market. Third, the rise in interest rates by the dollar and the US-China trade war have further exacerbated the problem. Shrinking global trade, combined with US-China trade tensions, has caused traders who once sourced goods from China to shift to other markets, dealing a fatal blow to China as a manufacturing powerhouse, leading to a double decline in demand and production.
How to deal with this situation? On the one hand, it is possible to wait for the economic cycle to turn favorable for China again. The Sino-US economic cycle normally shows the opposite trend. When the U.S. economy is strong, the Chinese economy may be relatively weak, however, when the U.S. cuts interest rates to stimulate the economy, the Chinese economy may have more opportunities.
On the other hand, we should not sit still, but need to adjust the income structure and reopen the monetary circulation channel. While waiting, stabilization measures such as stabilizing house prices, the stock market and residents' expectations are needed to prevent further declines. In addition, in order to solve the problem of sluggish consumption, it is necessary to reshape the social welfare system, transform the wealth of some wealthy classes into socially inclusive public services through institutional means, and solve the people's worries about medical care and unemployment. In this way, consumer confidence is expected to recover again, and the economy will gradually recover.
To sum up, the current Chinese economy is facing dual pressures such as the decline in CPI and the expansion of PPI decline, and the situation is not optimistic. However, through appropriate measures, including stabilizing the economic cycle and waiting for the opportunity, adjusting the income structure, and optimizing the social welfare system, China's economy may usher in new opportunities and return to the track of stable growth.