China faces a bleak winter of falling prices (and way too many pigs)

(Originally published Dec. 14 in “What in the World“) As a vicious cold snap brings northern China shuddering to a halt, Morgan Stanley’s Asia economist Chetan Ahya warns in an op-ed that the country could be flirting with a debt-deflationary spiral.

“To address the deflation challenge,” Ahya writes in the Financial Times, “policymakers need to use the full force of monetary and fiscal policies to lift aggregate demand.” China has been suffering from deflation since this summer. Consumer prices in November fell 0.5% from the same month of 2022, the fastest pace of declines since November 2020. Producer prices, meanwhile, fell 3% year-on-year, the fastest pace since August and the 14th straight month of declines.

A glut of pigs isn’t helping matters. Production of pork rose last year to an 8-year high, and pork production in the third quarter of this year climbed another 3.6%. Pig farms responded to the devastating outbreak in 2018-2021 of African swine flu by breeding heavily. But that has created oversupply, and pork prices in November dropped almost 32% from the same month of 2022.

Deflation not only makes it harder to repay debt, but reduces the relative returns for global investors, which typically prompts them to take their money elsewhere. That’s being borne out in the flow of global investment, which has been exiting China to seek better fortunes elsewhere. The Washington-based Institute of International Finance warns in its latest report on global fund flows that China could face $65 billion in further withdrawals of foreign capital next year.