this is a chart showing the change in consumer prices in China as you can see those prices have been falling a lot many economists are concerned that China is slipping into a period of deflation often an even worse scenario than high inflation at the country's legislative session in March Premier leang said Beijing would issue special treasury bonds to help stimulate economic growth but some investors are skeptical it will succeed here's why falling prices can be so dangerous not just for China but also for the global economy to understand what's happening in China let's look at Japan's recession in the 1990s or what many call its last decade Japan and way as the poster child for deflation this huge sort of bubble in stock market and real estate burst subsequent of that the economy slowed down prices fell sending the economy into a deflationary spiral which can be really hard to escape that's because when consumer prices fall people expect them to keep falling so they're more likely to wait to make that big purchase until some sometime in the future when it's cheaper lower spending means that companies make less profit that means they need less workers so what employment might go up spending gets even lower prices fall further so you get into this sort of uh Vicious Circle where uh prices are spending to sort of Chase each other lower one example of this was the Great Depression in the US where deflation led to slow economic growth then a big rise in unemployment Japan where working age population growth was turning negative didn't really struggle with unemployment there's very strong social pressure on companies in Japan not to lay people off in the way that there isn't in the United States and lots of other Western economies Japan's last decade is also commonly referred to as a balance sheet recession a term coined by Economist Richard coup which means put simply that everyone had kind of run up an awful lot of debt particularly companies in the preceding you know decade or so and every penny they made went towards servicing that debt so companies stopped spending and investing they stopped hiring the bank of Japan tried repeatedly over the years to stimulate economic growth from cutting interest rates to printing money but nothing quite got the economy back to where it was it took 34 years for its stock market to record a new high and the country's GDP per capita has hovered around $40,000 for a long time some economists say it's hard to pin down whether deflation is directly responsible for Japan's slower growth but deflation is more of a problem the longer it lasts it's a difficult problem to definitely identify until possibly it's too late that's what economists are afraid is happening right now in China the economy grew 5.2% last year as far as China's concerned though it's not great I mean China typically grows close to 6% 7% like Japan in the 9s China is also experiencing a real estate bust the economy got to a point where it really relied on real estate investment the government decided that it had enough of this because there was too much debt building up and so they made a big effort to try and squeeze developers property developers access to credit and that was in 2020 and since then the property Market has just kind of been in free fall many households are seeing the value of their homes drop which is driving down spending but unlike Japan where real estate prices collapsed very quickly in China it's happening much more slowly one strange thing is prices haven't fallen quite as much as they ought to have mostly because lots of local governments are propping them up and some economists certainly say that what needs to happen in China to get a real resolution to the real estate crisis is a much bigger fall in prices so that people start buying these apartments again economists are split on whether China's economy is just struggling due to some short-term factors and will soon work itself out or if this deflationary trend is spreading falling prices were you initially saw them very clearly in producer prices so the prices companies charged to take things out of their factories and then you started to see it in some categories of consumer prices particularly things like pork which is a big part of the Chinese diet and an important component of overall Consumer Price inflation deflation in China isn't just a problem for China it's also a problem for the rest of the world weak consumer spending in China means exporters have to ship goods overseas to find buyers and that's led to the price of Chinese exports falling too while cheaper prices are good for consumers they're putting pressure on domestic manufacturers around the world because China can produce a lot of goods more cheaply in Europe for instance there's a lot of anxiety at the moment over automakers so Chinese companies are making a lot of cars a lot of electric vehicles in particular and they're making them cheaply and they selling them all over the world in response countries like the US are imposing trade barriers against Chinese exports the type of bonds that China plans to issue as stimulus are typically reserved for economic emergencies this is only the fourth time in the past 25 years that China has issued bonds like these the fact that the three previous such Bond issuances each followed an economic crisis speaks to the Deep sense of urgency that officials are feeling right now they're very familiar with what happened in Japan and determined to avoid it whether they taking the right lessons from it I think is uncertain Japan when it entered into deflation and stagnation was the second largest economy in the world China is the world's second largest economy and to have that slide into deflation and stagnation would mean lower Global growth overall so it definitely is a problem for the rest of the [Music] world