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In response to the global financial crisis China pursued a policy of growth through expenditure on fixed capital. Over the past five years, investment in China has hovered at just under 50% of GDP. Across all developing economies, it averaged little more than 30% of GDP over the same period. With weak internal demand, that investment boom has left China with a considerable degree of spare capacity. China – now the world’s largest economy according to the IMF – is slowing. According to Fathom’s China Momentum Index (CMI), it is slowing more rapidly than the official data suggest. This will have material implications for price pressures, not just in China but around the world.
This week’s Chart of the Week shows two measures of domestic price inflation in China. Factory gate prices, measured by the producer price index, have now been falling for a record 32 months. The fall in the twelve months to October was spread across all nine components. Consumer price inflation is weak too. In the twelve months to October, China’s CPI rose by 1.6%, unchanged from the September reading and close to a five-year low. China’s economic slowdown has already put downward pressure on headline measures of inflation around the world, thanks to the impact it has had on the prices of oil and other commodities. The real trouble will come when, and if, China loosens the dollar peg. Then falling Renminbi prices would combine with a weakening currency to significantly reduce the own-currency prices paid by other countries for imports from China. Global deflation would then become a very real risk.
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