China Has Entered A State Of Deflation: Explained

Deflation is when things you usually buy, like toys and clothes, become cheaper. It might seem like a good thing because stuff gets cheaper, but it can actually cause some problems for the economy.

Imagine you're selling toys, but suddenly you can only sell a few each day. To get people to buy them, you lower the price of each toy. This is similar to what's happening in China.

There are a few reasons why China is facing deflation: 1. The government is getting involved in industries like technology and real estate. This affects how much things cost. When companies can't sell as much, they lower prices to get more buyers.

2. China is trying to reduce pollution, which can slow down production. When there's less stuff to buy, people don't want to pay much, so prices go down.

3. Consumers become cautious, delaying purchases expecting prices to drop. This reduces demand, prompting businesses to cut production and lower prices to stimulate buying.

4. Problems with trading with other countries, like the USA, can also affect prices.

5. Many young people can't find jobs, which affects spending.

6. The property business isn't doing well, affecting the economy. Some important builders can't pay back the money they borrowed, and lots of building projects are not finished.

7. Some government groups that borrowed money can't pay it back, causing problems for banks. All of these reasons make it hard for China to recover from the COVID-19 pandemic.

Think of two tools: The Consumer Price Index (CPI) looks at everyday things like food, clothes, and toys. If it goes down, these things are getting cheaper. The Product Price Index (PPI) looks at things companies use to make products. If it goes down, making things gets cheaper too. When both go down, it's a sign of deflation.

Many things we use every day are made in China. If their factories slow down, it can lead to shortages and higher prices.

China is also one of the world's largest consumers of commodities like oil, metals, and agricultural products. A slowdown in China  can lead to decreased demand for these commodities, causing their prices to drop on the global market. For easy explanation, click the link below