Inflation vs. Deflation: Implications for China


Time and time again, those in charge of monetary as well as fiscal policy try to find the right balance between avoiding deflation and not bringing about an inflationary spiral. The more let’s say vulnerable a nation is, the more it can be considered at risk from this perspective. To put it differently, things are less likely to spiral out of control in the United States or Germany than in an African nation, for reasons so obvious that there is little point in tackling this topic.

What about China?

Despite being the number two economy worldwide in nominal terms and the number one economy on a PPP basis, it would be premature to state that China can be placed in the same category as Germany or the US. Simply put, it doesn’t yet have enough of a track record as a robust/stable economy for this to be possible. At the same time, it most definitely cannot and should not be considered a weak or vulnerable country either.

We will limit ourselves to stating that from a nominal perspective, it wouldn’t be much of a stress to state that China and the West are in the same league, whereas on a granular level (from a GDP per capita perspective, for example), it lies somewhere in the middle on an “under-developed to developed” scale but closer to less developed nations.

Moving on, an important question arises: is deflation or inflation more problematic in general as well as for China in particular?

Right off the bat, it is important to point out that economists for the most part tend to fear deflation more, in light of the fact that it can be more difficult to get a country out of a deflationary spiral than an inflationary one.


  1. This also has to do with the fact that among developed nations, it has been quite a while since problematic inflation manifested itself. For the most part, more recent economic calamities have been deflationary in nature and from the perspective of a historical proximity argument, a case could be made that this state of affairs also contributes more to economists fearing deflation rather than inflation
  2. Less developed nations tend to have a more “problematic” relationship with inflation than developed ones and it is worth noting that most of the previously mentioned economists who manifest concern with respect to deflation are usually referring to developed countries. In light of the fact that China cannot be considered a truly developed nation just yet, this argument needs to be kept in mind
  3. Attitudes related to deflation and inflation vary by country. As such, the United States for example tends to be more concerned about deflation in light of its 1929 Great Depression experience, whereas for let’s say Germany, inflation tends to be associated with a more bitter taste due to their experience

As can be seen, while economists tend to “favor” inflation and be more concerned about deflation, the equation is quite nuanced and especially for a country such as China that can be considered more volatile, both need to be treated with the utmost professionalism.

How bad could things get?

Once again, this tends to depend on how strong a certain country is to begin with. A calamity such as the Great Recession, even if it had its origins in the US Mortgage-Backed Security debacle, ironically ended up affecting less developed nations even more so than the US. The same way, while the United States experienced its share of high inflation until Reaganomics and Paul Volcker’s monetary prescriptions kicked in, things were far worse elsewhere.

The somewhat painful truth is that in light of China not exactly being ready to join the exclusivist club of highly developed nations just yet, it is more vulnerable to both deflationary and inflationary shocks. Despite the PBOC oftentimes being criticized for devaluing the currency, it is important to point out that it also has to occasionally intervene so as to keep it from dropping uncontrollably. Again, “volatility” is the operative word.

At the end of the day, those who are interested in gaining exposure to Chinese assets so as to be on the receiving end of potentially generation-defining gains need to understand that high potential rewards come with a higher risk factor or, if you will, even “Wild West” element. If anything, the current volatility should make it clear that the “low hanging fruit” days are not yet gone in China and that there are still more than worthwhile opportunities to be had.

Even more so, it’s precisely volatility that can bring about remarkable opportunities for those bold enough to take action when everyone else is panic selling. A savvy investor in “all things China” will be rubbing his hands greedily while the market panics because he has a firm grasp on the difference between China’s long-term potential which isn’t exactly going anywhere and short-term fluctuations (painful as they may be).

Should you or your organization be in need of assistance with anything from understanding the big picture with respect to China to timing-related aspects, the team of experts is ready to help. To find out what we can do for you broadly speaking, visit our Consulting section and to get to know the team behind this project, visit the About Us section of Alternatively, you can of course simply send us a message through our Contact page and we will take things from there.

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