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“China seems to be upside down compared to Europe and the US.”

ABOUTOnce upon a time, children in Europe wondered how Australians managed to walk upside down. China is not located on the antipodes, but it seems to be upside down compared to Europe and the United States. As the US Federal Reserve decides to keep interest rates high to contain inflation that is barely slowing, China faces the opposite question: how to raise prices?

For 20vol month in a row, producer prices fell by 1.4% in May compared to 2023, after falling by 2.5% in April. According to Beijing, consumer prices increased by 0.3%. Bloomberg attributed this modest increase mainly to higher utility prices (energy, water, transportation) rather than household spending. Households continue to feel the effects of the housing crisis and the slowdown in the labor market. Economists polled by Bloomberg expect inflation to be around 0.7% in 2024, instead of the government’s official target of 3%.

Price cuts would be a dream come true on this side of the planet, but deflation is just as deadly as inflation because it encourages people to delay purchases and eats into corporate profits and ultimately wages, which in turn reduces purchasing power. All this harms consumer growth and morale.

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Relieving anger

To combat this, the government has two weapons at its disposal. The first is to help companies export their products to compensate for poor domestic sales. And the second is to increase consumption through aid programs, such as subsidies for the purchase of electric cars.

However, export assistance depends on customer acceptance. America no longer wants Chinese products, and Europe has decided to impose high taxes on electric cars flooding its ports. To defuse this anger, Premier Li Qiang made a large tour of his Malaysian and Oceanian neighbors, especially New Zealand and Australia. But the country will also have to acknowledge that reducing the share of export industries in its economy in favor of services is part of a normal development cycle.

In terms of stimulating consumers, the first step would be to resolve the housing crisis that is ruining China’s savings and lower interest rates. China, however, would like to see the Fed eventually lower interest rates to prevent the currency from being destabilized by too much of an interest rate differential. These two can’t get enough of watching each other yet.