China-US Economic Divergence: Deflation to Inflation
In recent years, China has been grappling with a challenging issue: how to overcome deflation, weak domestic demand, and sluggish consumption within its economy?
When might this situation improve? It's perhaps unexpected, but inflation made a sudden comeback in August 2024. This time it’s for real—can the Chinese economy seize this opportunity for a turnaround? How severe will the consequences be for the United States if it fails?
A Major Shift in the Sino-U.S. Rivalry
Why has China refrained from flooding the economy with easy monetary policy in recent years? Why has it adopted a more cautious approach to economic stimulants?
In reality, both China and the United States are biding their time. The United States carries a staggering $35 trillion in debt, facing immense pressure to reduce its reliance on the dollar globally, yet it stubbornly raised interest rates to 5.5%.
On the other hand, China is enduring a stagnant real estate market and a sluggish stock market, yet it remains steadfast against significant interest rate cuts, choosing to release liquidity gradually, like squeezing toothpaste.
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After such a protracted tug-of-war, inflation has finally started to show signs of reversing!
Recent inflation data are substantial, based on two critical points of information.
Firstly, cities like Beijing, Guangzhou, and Shanghai are experiencing sharp price increases. Some have reported going to local markets and finding the prices of various vegetables such as green beans, leafy greens, loofahs, and tomatoes rising, some even higher than during the New Year.
Such increases in daily essentials often signal that overall prices may indeed be rising. Secondly, while some suggest this could merely be seasonal fluctuations, the reality is otherwise.
This year has seen abundant rainfall across many regions, and with summer nearing its end, we have yet to reach the peak production period for fruits and vegetables; hence, any price increases at this time are very legitimate. This indicates that our economy is warming up, gradually emerging from the lethargy of the past two years.
Next, let's briefly revisit the past two years of subdued consumption and CPI along with the deeper issues that underpin them.
The primary culprit has undoubtedly been the rising interest rates of the U.S. dollar. By June 2022, the dollar's value had decreased, and U.S. inflation soared to 9.1%, hitting a four-year high.
If the situation continues to deteriorate, the dollar could significantly devalue, potentially triggering a credit crisis that could see the U.S. lose its status as the world's hegemon.
In order to safeguard its position, the U.S. has spent the last two years significantly raising interest rates, attempting to curb inflation by recalling excess dollars printed in the market.
However, this approach only addresses superficial issues; while the quantity of circulating dollars may have decreased, the total supply of dollars in the global market remains unchanged.
To truly resolve inflation problems, it's essential to find new commodities that can absorb the excess dollars issued, ensuring a balance between currency and goods.
As the pandemic gradually wanes in 2023, global production capacities rapidly recover, causing countries to compete fiercely for our orders, resulting in nearly a year of stagnation in our exports.
At the same time, the U.S. has been shifting low-end manufacturing to countries like Vietnam and India with lower labor costs, aiming to cultivate a second “China.”
This not only directly impacts our exports and foreign trade orders but also indirectly affects our economy and consumption.
The U.S. has many tricks up its sleeve, but we also have countermeasures to implement.
The Secret to Resilience Amid Adversity
What efforts has China made? Why has the U.S. suddenly decided to engage with China?
In the face of these challenges, China has adopted some surprisingly strategic approaches. While the U.S. has opted for consumer subsidies and a frenzy of money printing, China has focused on supporting production.
Consequently, many of our enterprises experienced a phase of capacity expansion in recent years, and numerous young people have returned to their hometowns to start their own businesses after leaving larger corporations.
In other words, we did not sit idly by; rather we worked to mitigate the adverse effects stemming from U.S. interest rate hikes by expanding market share.
Imagine if the U.S. were to succeed; then the world would continue to face relentless dollar dominance and endless conflict.
However, if the U.S. can no longer sustain its position and begins to lower interest rates, the outflow of funds will flow back to China, facilitating quicker industrial upgrades and ushering in the next rapid phase of development.
Currently, it appears that the U.S. is indeed struggling and is beginning to consider rate cuts. Moreover, China's inflation data have effectively disrupted the U.S.'s plans to reap benefits from interest rate increases while the anticipated deflation hasn't come to pass.
The reasons for asserting that the U.S. is struggling can be seen in its fast-approaching debt, nearing $35 trillion. At current interest rates, the annual interest alone amounts to a whopping $1.2 trillion.
If interest rates were to rise further, it could trigger a debt crisis that would devastate the U.S. economy.
China has been preparing to tackle U.S. financial risks since 2021.
Initially, it launched the "three red lines" policy, which preemptively detonated risks within the real estate market.
It has also consistently monitored overheating segments of the stock market such as those related to the internet, semiconductors, and healthcare, effectively squeezing out asset bubbles and defusing financial risks.
Even in the face of pressures from slowing economic growth and declining stock markets, it has maintained small-scale interest rate cuts to gradually stimulate the economy.
All of this aims to prevent the U.S. from inflating domestic asset prices, thereby avoiding potential bubbles. As long as we can hold on without providing the U.S. with an opportunity to exploit, the next phase will be one of successful industrial upgrades and a robust economic rebound for China.
Now that recovery has begun, it's primarily due to profound changes in the global trade landscape. Notably, China's exports to developing countries have surpassed those to developed nations, and this gap is likely to widen.
China's manufacturing capacity is now 1.5 times that of the U.S., which is a significant statistic.
In 2023, China's total manufacturing output accounted for 35% of the global total, exceeding the cumulative output of countries ranked second to tenth.
In 2023, the U.S. manufacturing output totaled $2.8 trillion, while China's reached $4.68 trillion—approximately 1.67 times that of the U.S. The economic landscape between the two countries has begun to shift.
From a global perspective, China's inflation signals that the expanded production capacity of the past few years has fully integrated into the global economic system and is progressively being absorbed. This round of economic expansion can be considered largely complete.
Conversely, the U.S. may be headed for a prolonged inflationary trap, with issues surrounding national debt, dollar depreciation, financialization, and hollowing out becoming increasingly severe.
Given that the balance of power has shifted, why hasn't China initiated a counterattack against the U.S.?
In Sino-U.S. Relations, Culture is Central
As a responsible major power, China prioritizes cooperation and win-win outcomes as its core tenet.
Upon delving into the root causes of the Sino-U.S. confrontation, it becomes evident that cultural attributes form the core essence of this latest round.
In ancient Western societies, order was primarily maintained through religious frameworks, while in China, it has relied on a moral system.
Historically, every advancement in Chinese society has been significantly driven by moral imperatives, leading to nurturing the noble ideals of "self-cultivation, family regulation, governance, and world peace." When faced with problems and difficulties, solutions have always been approached from the standpoint of overcoming challenges and resolving issues.
Looking at the operational dynamics of those Western societies, one can see they revolve around theocratic elements, and this mindset is deeply rooted among the people, often placing individual interests above all else.
Thus, we can comprehend why behaviors driven by self-interest, often at the expense of others, are so prevalent in Europe and the United States.
Returning to this cycle of interest rate hikes, the U.S. has not only flexed its financial muscle but has also stirred conflicts among nations around the globe.
There exists a distinct air of arrogance and bias in the way the U.S. engages with other nations.
Additionally, history demonstrates that the fragmented nature of European nations is a deliberate creation of national and ethnic differences.
Such differences are often used to dissect the primary populations of countries into smaller factions, subsequently inciting disputes and sowing discord within nations.
As the reversal comes into play, if the dollar enters a cycle of interest rate cuts, China will have greater leverage to attract new investments, thereby enhancing the capacity expansions accomplished with China's full support.
The next phase of capacity expansion will require global capital's collaborative participation. In this context, China is poised to usher in a new era of economic prosperity. Therefore, the coming years may very well mark a significant turning point in history.
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