🔍 The focus this week: China’s falling prices

While much of the world is still battling the final vestiges of high inflation, China is grappling with a very different (and arguably thornier) problem: deflation. See, a three-year crisis in the property sector has dented household wealth and buying confidence, and that’s caused folks to spend less. This drop in aggregate demand has left consumer prices stagnant since early 2023. For example, figures for October showed annual inflation unexpectedly declined to a fourth-month low of 0.3%, despite a huge new stimulus package that aimed to get folks spending again. And the worry about deflation is that once it starts, it’s very hard to stop.

Economists expect November’s figures, due on Monday, to show a slight uptick in the inflation rate, though it’s likely to remain below 1% for the 18th consecutive month. Now, an above-zero result won’t necessarily mean that China’s economy is out of the woods. After all, there’s a broad measure of prices that shows that the world’s second-biggest economy is still firmly in the deflation zone. That’s the “GDP deflator”, which compares the size of the economy in nominal and real (i.e. inflation-adjusted) terms. This measure offers a more comprehensive view of inflation than consumer prices alone because it takes into account price changes for all goods and services produced within an economy. So that’s the bad news: the metric shows there’s been six consecutive quarters of deflation – the longest stretch since 1999.

That’s sure to worry policymakers, since prolonged deflation can lead to a downward spiral of economic activity. Look, here’s what happens: consumers – anticipating further price drops – tend to delay purchases, which dampens already weak consumption. Businesses, in turn, typically lower production and investment because of uncertain demand. What’s more, those falling prices generally lead to lower corporate revenues, which can hit wages and profits. Finally, though prices and wages fall during deflationary times, the value of debt doesn’t – so that adds to the burden of repayments and raises the risk of defaults.

📅 On the calendar

• Monday: China inflation (November), China loan growth (November), eurozone economic sentiment (December). Earnings: Oracle.
• Tuesday: China trade balance (November).
• Wednesday: US inflation (November). Earnings: Adobe.
• Thursday: European Central Bank interest rate announcement. Earnings: Broadcom, Costco.
• Friday: UK economic growth (October), eurozone industrial production (October).

👀 What you might’ve missed last week

US

• Bitcoin topped $100,000 for the first time ever.

Europe, Middle East, and Africa

• OPEC+ delayed its plan to begin raising oil production until April.

Asia

• China’s long-term bond yields fell below Japan’s for the first time.
• China banned shipments of several key minerals, as trade tensions with the US amped up.

✍️ What does all this mean?

Bitcoin’s had another big week, breaking above $100,000 for the first time ever on Thursday, as it continues its post-election rally. Not surprising then that US ETFs that invest directly in bitcoin (and ether) saw unprecedented demand in November, according to data released last week. Bitcoin and ether ETFs each set new monthly net inflow records, at $6.5 billion and $1.1 billion, respectively, as investors bet on a more favorable regulatory environment in the US.

OPEC+ oil-producing countries put the brakes on a plan to begin raising crude production – delaying the move until April – as they continue trying to revive sluggish prices. They had intended to open the taps in January, increasing their collective output by 180,000 barrels a day, as part of a gradual unwinding of 2.2 million barrels a day of cuts over 12 months. But the world’s big oil cartel has now agreed to delay the move by three months – marking the third time it has postponed its plans to increase supply. It also announced that it will unwind the cuts at a slower pace than previously laid out.

China’s 30-year bond yields fell below Japan’s for the first time, and that’s led some folks to worry about a potential “Japanification” of the Chinese economy – i.e. a situation where it becomes mired in deflation. The concern is that certain conditions in China echo those seen in Japan in the 1990s when a real estate bust led to decades of falling consumer prices and low economic growth. Deflation tends to sink bond yields because it increases the real value of fixed-income payments, making bonds more attractive to investors and driving up their prices, which in turn lowers their yields.

China said it would no longer export certain materials with high-tech and military applications to the US, a tit-for-tat move after the White House escalated technology restrictions on China. The new curbs apply to gallium, germanium, antimony, and other materials – which are used in things like semiconductors, satellites, and batteries. And it won’t be welcome news in the US, which sourced over 50% of its germanium and more than 20% of its gallium from China between 2019 and 2022.