As China slips down the deflationary toilet, Congress looks to pull the plunger

(Originally published Dec. 13 in “What in the World“) As if China didn’t have sufficient ailments, the U.S. Congress is spoiling to slather salt in its wounds.

The House of Representatives’ bipartisan Select Committee on the Chinese Communist Party, which was established in March to confront the “existential struggle” against China, on Tuesday issued a report with 150 recommendations for striking back against what it called China’s “multidecade campaign of aggression” against the U.S. Among its prescriptions were calls to revoke the low tariffs applied to China when it joined the World Trade Organization in 2001, impose new ones on its semiconductor imports and further restrict the flow of money and technology from the U.S. to China.

The committee’s report comes as China is already slipping deeper into a deflationary funk. 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.

China has been in deflation since this summer, the first time it has done so since the global financial crisis in 2009. As explained in this space back in August:

Deflation is toxic for anyone shouldering massive debts, as revenues follow prices lower, but debt servicing costs remain the same. The declines tend to accelerate once consumers and investors realize that all they have to do is wait to get a better bargain tomorrow on things like high-rise apartments—a dreaded deflationary spiral.

Worsening deflation will only exacerbate concerns, therefore, among foreign investors and credit ratings agencies about Beijing’s ability to keep a lid on China’s massive debts, notably those at provincial and city governments. The news helped push China’s renminbi to a three-week low. That development itself will make it harder for Chinese developers to repay debts they’ve borrowed offshore in dollars.

China’s leaders on Tuesday ended their annual, two-day Central Economic Work Conference pledging to boost fiscal and monetary support for the economy, but didn’t spell out specific measures for doing so.