The Chinese economy faces significant challenges as it faces deflation, a housing crisis and weak domestic demand. Despite government stimulus measures, the hoped-for economic recovery has not materialized.
Deflationary tendencies and their causes
In November 2024, China’s consumer price index (CPI) rose just 0.2% year-on-year, marking the lowest increase in five months. Fresh food prices fell as industrial deflation continued. These developments suggest that Beijing’s efforts to boost demand are having limited impact so far.
Deflation in China is fueled by several factors:
- Weak domestic demand: Despite the lifting of the zero-Covid policy, consumer confidence remains subdued, leading to cautious consumption.
- Real estate crisis: The collapse of the real estate market has shaken household confidence and reduced demand for real estate and related goods.
- Overcapacity in industry: High production capacities combined with weak demand lead to falling producer prices.
State economic stimulus measures and their effects
In view of the economic weakness, the Chinese government has taken various measures:
- Interest rate cuts: The central bank has cut key interest rates to encourage lending and boost investment.
- Relaxation of lending criteria: Mortgage requirements have been relaxed to support the housing market.
- Fiscal stimulus: Programs have been introduced to encourage consumption and support businesses.
Despite these measures, the hoped-for economic recovery has not materialized. Analysts are therefore calling for more comprehensive and targeted stimulus to break the deflationary spiral and promote sustainable growth.
Is there more new liquidity coming into the market now?
The threat of deflation in China could force the central bank to… monetary policy to loosen further. The People’s Bank of China (PBoC) has already cut interest rates several times and made lending easier to stimulate the economy. If deflationary tendencies continue, further measures could follow, such as an even more aggressive cut in key interest rates or increased liquidity injections for banks and companies.
Such monetary easing would impact not only China’s domestic economy, but also global markets. For the financial sector, more favorable credit conditions and increased liquidity flow could create new investment opportunities. Stock markets in Asia, which are closely linked to China’s economy, could particularly benefit.
These developments could also be positive for the crypto market. Expansionary monetary policy often leads to an increase in demand for alternative assets as investors look for returns beyond traditional bonds.
Cryptocurrencies could become attractive as an inflation-resistant asset class in this scenario. In addition, increased interest in digital assets in China itself – despite regulatory restrictions – could increase global trading volumes.
If the PBoC actually implements a looser monetary policy, this could be a decisive stimulus to revive both traditional and digital financial markets. For investors, this is a sign to closely monitor developments in China, as the economic policies of the world’s second-largest economy could have far-reaching effects.