China heads for a deflationary shock

Monday, July 9, 2012
By Paul Martin

By Ambrose Evans-Pritchard
TelegraphUK
July 9th, 2012

China is on the cusp of a deflationary vortex.

This was signalled late last year by the sharpest contraction in the (real) M1 money supply since modern records began. The hard data is now confirming the warnings.

Consumer prices have been falling for the last three months, producer prices have been falling for four months. This is not a food cost story. It is systemic.

“While an economy-wide generalized deflation is yet to be seen, the deflationary spiral looks to have started in some industrial sectors, attesting to considerable stress with the economy. Persistent deflation can be poisonous,” said Xianfang Ren from IHS Global Insight in Beijing.
Indeed it can be poisonous, and China already has the twin-afflictions of the deflation malaise: a fast aging nation, and a surfeit of factories and industrial plant.

Meanwhile, Japanese machine tool orders fell 14.8pc in May, the biggest drop since 2001 – when Japan’s deflation began in earnest. The post-Fukushima reconstruction boom has run its course. Asia is turning stone cold.

All engines of the global economy are sputtering at the same time.

Chinese premier Wen Jiabao called for a “proactive fiscal policy” to keep the economy afloat, warning that “downward pressure is still relatively large.”

The Rest…HERE

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