Roger’s $0.02 - China Deflation

Image from Geralt

There are signs that signal China’s economy is entering a deflationary cycle. With inflation, the price of goods and services increases over time which decreases the purchasing power of the consumer making things more expensive to buy. It’s what many nations like the US, UK, and Germany are currently experiencing. When an economy experiences deflation the prices of goods and services decrease over time increasing the purchasing power of the consumer by making things cheaper to buy. On the face of it sounds good. Who wouldn’t want things to be cheaper? But the deflationary pressures have a very big downside. One is that indicates consumers have low faith in the economy. They hoard money because they’re looking to cushion themselves against financial distress. Also with less economic activity businesses have less income leading to staff layoffs, fewer b2b trading, and in some cases a complete shutdown or insolvency. Finally, there’s the specter of a deflationary spiral. According to Investopedia “A deflationary spiral is when price levels decline, leading to lower production, reduced wages, decreased demand, and continued price declines. Deflation can ripple through the economy, causing some consumers and companies to default on debt obligations.” In other words, the economy grinds to a halt as a feedback loop causes fewer and fewer people to engage in economic activity.

Now depending on what China’s central government does to address the country’s economic woes this might be a short-lived or a longer term trend. If the CCP decides to stimulate the economy by giving citizens a one time disbursement of cash in the way many governments did during the pandemic it could help kick-start the Chinese economy. However that would introduce new inflationary pressures in economies around the world as Chinese consumers increase demand for imported products. This would help sustain economies that rely on the Chinese market but it would also mean interest rates would have to be kept high or higher for a longer period of time. However, if the Chinese government does nothing and lets their overheated economy cool down it would spread deflationary pressures across the globe. This would mean countries depending on the China to buy their products would see a loss in sales. But it would also mean prices for many goods would go down and interest rates could ease making things a bit cheaper for most people.

So why am I mentioning this on DTNS? Because China despite recent moves by the US and other Western countries to de-risk their economies from the country is still the largest producer of electronic goods in the world. Not just finished products like Phones, TVs, laptops, and tablets. But also electronic components like transistors, capacitors, ICs, diodes, resistors, and the rest. If China’s central government leaves things as is Chinese exporters will begin selling their offerings at a discount. This could result, in the short term, in a price reduction on a number of goods including electronics. While the effect would be minimal on higher priced small volume products like enthusiast components like processors, high-end GPUs, or professional grade monitors but on things like SD Cards, PC cases, traditional hard drives, and other peripherals it could be a bargain shopping. And not just computer gear. Other electronics like stereos, speakers, drones, security cameras, and e-scooters and e-bikes might also see price drops. If the China does offer some sort of public stimulus the inflationary you could prices for those same products go up. In either case there is a positive and negative consequences with either path. So you’re in the market for PC upgrades, new connected devices or a new phone keep an eye on prices. They might be volatile over the next few months.