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China’s economic challenges: inflation slows, deflation risks linger

ByDave Stopher

Jun 21, 2024

China’s economic challenges: inflation slows, deflation risks linger

On a month-on-month basis, inflation in China slowed in March, slipping to +0.1% (-1% month-on-month) from the previous month’s +0.7%, contrary to the analysts’ expectations of +0.4%. This deceleration is linked to the diminishing boost in consumer spending following the Lunar New Year holiday in February, with concerns about deflation still present. China still grapples with the risk of deflation as domestic demand remains weak, while fiscal spending lags behind; insufficient export growth persists without more favorable fiscal policies. The Chinese economy is facing significant challenges due to the real estate sector crisis, substantial debts accrued by local governments and state-owned enterprises, and high youth unemployment. These factors are adding complexity to the central government’s efforts to encourage consumer spending.

China’s economic slowdown is raising global jitters. Worries about a domino effect are high, but the impact may be uneven. China, the world’s #2 economy, faces slow growth, high youth unemployment, and a property market crisis. This could hurt global giants like Apple and Volkswagen, reliant on Chinese consumers. Their suppliers worldwide might also feel the pinch.

China’s massive trade surplus means it keeps most of its economic gains, limiting the direct impact on others. While a slowdown will be felt globally, as China drives a third of world growth, it might not be a global crisis. Ultimately, how much China’s woes affect you depends on your connection to its economy. Multinational corporations and their workers are more exposed than others.

Nevertheless, Beijing has set an official growth target of “around 5%” for 2024, following the 5.2% achieved in 2023. As for producer prices, the March data showed a further decline to -2.8% (from April’s -2.7%), extending the negative streak to 18 consecutive months and marking the worst pace since November 2023. Inflation presents opportunities for traders through various strategies that capitalize on rising prices across different assets.

  • Commodities: gold, oil, and agricultural products have a history of acting as hedges against inflation. Traders can profit from this by using futures contracts, options, or commodity-focused ETFs.
  • Stocks: inflation doesn’t impact all companies equally. Industries such as energy, materials, and industrials tend to perform strongly because they have the ability to adjust prices in response to rising costs. 
  • Inflation-Protected Securities: treasury Inflation-Protected Securities (TIPS) are government bonds that shield investors from inflation. Their principal value adjusts with inflation, measured by the Consumer Price Index (CPI). 
  • Currencies: inflation weakens fiat currencies. 
  • Real Estate: For traders in the UK, accessing real estate markets is possible through platforms like, which enables trading across various financial instruments, including REITs. Furthermore, trading real estate stocks or options provides a way to engage with inflationary trends within the housing market.

China’s economic journey over the past three decades has been characterized by remarkable growth that transitioned the nation from a low-income to an upper-middle-income status. The country’s GDP surged to $18.3 trillion in 2022, equivalent to 73 percent of the United States’ GDP, a stark contrast to the mere 7 percent it represented in 1990. Similarly, China’s per capita income soared to around $13,000, a substantial increase from less than 2 percent of the US per capita income recorded in 1990.

Despite this impressive growth trajectory, concerns persist about the sustainability of China’s economic model. China’s growth has heavily relied on investment, particularly in physical capital like real estate, fueled by an inefficient banking system. The proliferation of domestic debt, particularly in the real estate sector, coupled with a shrinking labor force and high youth unemployment, have led some analysts to predict imminent economic challenges.

However, arguments against an impending economic collapse suggest that while reforms are necessary to address institutional weaknesses and rebalance the economy, a catastrophic collapse is not inevitable. China’s growth has been gradually shifting towards a consumption-driven model, with the services sector now a significant contributor to GDP and employment.

Looking ahead, China’s growth prospects hinge on improving productivity, reducing debt, and navigating external challenges such as geopolitical tensions and access to foreign technology. While risks remain, China’s ability to manage economic stresses and implement strategic reforms will shape its economic trajectory in the coming years.

For multinational corporations and their workers, the impact of China’s economic slowdown is more direct due to their close ties to the Chinese economy. Beijing’s official growth target of “around 5%” for 2024 and ongoing economic reforms will continue to shape China’s economic trajectory and influence global markets.

By leveraging insights from China’s economic situation, such as inflationary pressures and growth targets, traders can develop strategies to capitalize on market movements and economic trends, both within China and globally. This allows traders to potentially profit from changing economic conditions and market dynamics in a few ways:

  • Identifying undervalued assets: When economic data suggests a slowdown, some Chinese companies or sectors might become undervalued. By understanding these trends, traders can buy assets they believe are underpriced, with the expectation that their value will rise as the economy recovers.
  • Hedging against risk: Traders can use financial instruments like options contracts to protect themselves from potential losses caused by economic fluctuations in China. For example, if a company relies heavily on exports to China, they could use options to minimize potential losses if Chinese consumer spending weakens.

Short Selling and the Potential for Volatility

In some circumstances, traders might choose to short sell assets they believe are overvalued based on China’s economic situation or other factors. Short selling involves borrowing and selling an asset with the expectation that its price will decline. Traders then repurchase the asset later at a lower price and return it to the lender, profiting from the difference. It’s important to note that short selling is a risky strategy and can lead to significant losses if the asset’s price increases. This is because there’s no limit to how high the price can go, and short sellers are obligated to repurchase the asset to return it, even if the price spikes.

The Role of Automated Trading and Potential Risks

The increasing use of algorithmic and bot trading in today’s markets can add another layer of complexity. These automated systems can trigger buy and sell orders based on pre-programmed parameters. In situations where a shorted asset experiences a sudden price increase, also known as a long squeeze, these bots can trigger margin calls. A margin call is a demand from a broker for a trader to deposit additional funds to maintain a minimum account balance required to hold a leveraged position (borrowing money to invest). If a bot doesn’t have sufficient funds to meet a margin call, it may be forced to sell its holdings, further amplifying the price increase and potentially exacerbating the long squeeze.

Mitigating Risk Through Diversification

Understanding these dynamics is crucial for investors navigating the ever-changing market landscape. While short selling can be a tool for experienced traders, it’s important to be aware of the inherent risks. Maintaining a well-diversified portfolio across different asset classes can help mitigate these risks and provide a more balanced investment strategy.