Cautious Consumers Could Push China into Deflation

Far from the inflation worries that recently plagued the West, Asia is growing concerned about the consumer, and consumer prices, with parts of the continent teetering on the brink of deflation.

There’s much handwringing about the prospects of Asian nations such as China mimicking Japan, which suffered through the better part of three decades of deflation after its 1980s asset bubble burst.

This week alone, we got consumer-price readings out of China that dip in and out of contraction. Further hints of “Japanification” come from China’s government-bond yields, which have sunk to record lows, with the yield on China’s 30-year bonds falling below their Japanese Government Bond (JGB) counterparts for the first time ever.

Elsewhere, South Korea reports that consumer sentiment dropped sharply in December, meaning consumption likely contracted as well. Japan, while now experiencing welcomed mild price gains, reported wages that moved backward when adjusted for inflation.

And India, the new economic powerhouse of the region, lowered its official forecast for economic growth to 6.4% for fiscal 2025, down from 8.2% the prior year. While consumption is projected to expand 7.3% in India, capital expenditures and investment spending are a concern that the government hopes to offset with its own spending.

China this week reported that consumer prices decreased 0.1% year on year for December, with food prices in particular being soft. That means inflation in China ran at 0.2% for full-year 2024, the same as 2023. Nomura is forecasting a similar readout this year, too.

In response, Beijing is expanding a trade-in program introduced last year to encourage households to buy new appliances such as air conditioners and washing machines. As of this year, the scheme will also include microwaves, rice cookers, dishwashers and water purifiers, not to mention smartphones and tablets if they cost less than C¥6,000 ($818).

Consumers can receive subsidies of 15% to 20% from the trade-in, according to China’s state-planning agency, the National Development and Reform Commission. The finance ministry has allocated C¥81 billion ($11 billion) to the scheme for this year.

The government has already allocated the same amount to this year’s program. While retail sales as a whole only inched ahead 3% in November, missing expectations, there was a 22% rise in goods covered by the scheme such as household appliances and TVs.

Besides global issues such as heightened geopolitical tensions and the issue of likely higher trade tariffs under incoming U.S. President Donald Trump, China’s economy is one of the main Asia-specific concerns. S&P Global says in reviewing credit conditions for the year ahead that the risk over China’s economy is rated “high” and “worsening,” with the prospect that a slowing China could spill over to nearby nations that rely on Chinese demand.

Chinese stocks were one of the highlights of last year — I noted Chinese listings in Hong Kong were, surprisingly, Asia’s best performers in 2024 — thanks to the as-yet unfulfilled promise of fiscal and monetary stimulus to kickstart the economy. At least with the trade-in program, Beijing is cracking open the finance-ministry coffers to encourage consumption on its way.

But Chinese stocks have started this year on the back foot. The Hang Seng in Hong Kong is down 4.4% in the early days of 2025, while the CSI 300 of the largest mainland listings is down 5.1%.

On a more positive front, we’ve just heard that nominal wages in Japan grew 3% year-on-year for November, an acceleration from the 2.6% rate for October.

But Japan has exited the better part of three damaging decades of deflation, and is “enjoying” modest inflation of 2.9% as of the November reading. That eats into real wages, producing a 0.3% decline in take-home pay once you adjust for it. It’s the fourth straight month of shrinking pay packets, although the gap did narrow from 0.4% in October.

The central Bank of Japan last July finally begun to raise interest rates that it had maintained in negative territory since early 2016. Like many central banks, it would prefer to see inflation run around 2%, but it also wants to see growth in real wages before it is confident that prices, wages, inflation and interest rates are all able to inch ahead.

Looking to Nomura’s forecasts for the year ahead, it’s now predicting that growth in China will slow to 4.0%, while consumer prices will rise just 0.4%. Perhaps investors should be looking to the welcome 2.2% consumer-price increase forecast for Japan for guidance, even if overall Japanese growth ticks ahead only 1.5%, with India leading Asia both in likely price increases (up 4.5% for 2025) and economic growth (up 5.8%) in 2025.

At the time of publication, McMillan had no positions in any securities mentioned.