I am constantly surprised by the media attention for the Chinese deflation problem, which is treated as a great mystery. In fact, almost all modern examples of deflation have the same explanation – relatively tight money. (Certainly, deflation can be caused by a positive supply shock, but that is rare under modern Fiat money regimes.)
Central banks can only hit one goal at the same time. Most developed countries focus on inflation at around 2%, which forces them to make very volatile exchange rates possible. Those who stabilize their exchange rate cannot focus on inflation. When their currency is overvalued, they are forced to participate in “internal devaluation”, ie deflation of domestic wages and prices.
In recent decades, the Currency of China Rigid has been set on the US Dollar (1995-2005 and 2008-2010), or held in a narrow band around the US dollar. The Chinese government has never allowed the Yuan to go up or down dramatically, as we see with other currencies such as the Yen, the euro, the pound and the Swiss Frank. Due to China’s exchange rate policy, Chinese monetary policy is essentially made in the US. A strong dollar in the currency markets leads to deflation in China. Period, end of the story. But the press consistently ignores this problem. Here Bloomberg:
Why does China experience deflation?
Prices shot in the US and other major economies when they reopened after the COVID-19 Pandemie, because the demolished demand coincided with deficits in the supply of many goods. Predictions that the same would happen in China turned out to be wrong. Consumer spending power is weak and a real estate slump Dented trusting trust, leaving people from buying items with a large ticket.
A tightening of the regulations in well -paid industries such as technology And finance Has led to dismissal and salary reductions, so that the appetite for expenditure is further filled in. A policy to develop manufacture And high -tech goods stimulated the increased production, but the demand for these goods has been weak, forcing companies their prices.
That’s it. That is the whole explanation. Much of the rest of the article is devoted to possible solutions, without reporting exchange rate adjustment or internal devaluation.
The article even contains a graph that offers very strong indications about what these repeated episodes of Chinese deflation cause:
The gray tires represent periods of deflation using the GDP deflator. Note a longer period in the late 1990s, a short period around 2009, a short period around 2015 and a longer period since 2023.
Now let’s investigate the real exchange rate for the US dollar against a basket with other currency:
Note a very strong appreciation for the dollar in the late nineties, a short increase in 2009, a new increase in 2015 and an extremely strong dollar in recent years.
Of course it does not fit perfectly, because the Yuan was not rigidly established in the US dollar. The Yuan was somewhat written off at the end of years, which helped to make the deflatoire period 2015 fairly short. And the real exchange rate of balance can move for reasons that are not related to monetary policy. But as a general rule, a strong American dollar means tight money for every country with its currency linked to the dollar, or even held relatively stable against the dollar.
So why didn’t most other countries have deflation in the late nineties? Most other countries allocated their currencies to double the dollar. Those who did not do that (China, Argentina, Hong Kong) generally experienced deflation. Deflatie also found countries that only allow a small currency debit, due to pressure from the US government. The Japanese exchange rate of Yen/US Dollar showed very little change between 1997 and 2002, while most of the rest of the world were worth their currency sharply. The result was Japanese deflation.
It is not complicated. In the 21st century, deflation is generally caused by a policy of exchange rate stabilization in combination with a strong US dollar.