China's deflationary spiral

The economic situation in China just keeps getting worse. To the extent that they can be trusted, a series of recent data releases confirmed that the Chinese Communist Party's (CCP) 5% growth target is going to be very hard to achieve this year:

"Data published Saturday showed industrial output marking its longest slowing streak since 2021 last month, while consumption and investment weakened more than expected."

Here's the accompanying chart:

Those rates of growth wouldn't be bad at all in an advanced economy. But China still hopes to grow at developing economy rates, which is hard to do when sectors like manufacturing are slowing and outright deflation has taken over in many other areas: China's GDP deflator, which measures all prices in the economy (the consumer price index is a selective basket of goods), has shown declines for six out of the last seven quarters:

President Xi Jinping's response so far has been to order analysts not to discuss it:

"Economists, brokerage analysts, and researchers all told the publication that regulators, their employers, or local media had warned them not to talk about deflation, slumping foreign investment, and faltering growth."

That, and to tell his officials "to strive to achieve the country's annual economic and social development goals".

I'm sure it will work and China will hit, or come very close to hitting, its 5% growth target this year. Not because Xi's good-vibes-only intervention will revive the ailing Chinese economy, but because the statistical agency is at his behest – and it's not like China doesn't have a long history of fudging its numbers for political ends.

But beneath the aggregates there's a lot going on. And to be fair to Xi, there's only so much that he can do without losing face or further riling up major trading partners such as the US.

The long shadow

Pundits have been calling for a "bazooka stimulus" to fix China's economic woes.