Ultra-low China CPI alters domestic and world dynamics

Significance

This ultra-low inflation environment poses new challenges for China's development prospects. It underscores mounting structural problems and weakens the confidence of consumers, investors and producers. Globally, it impacts GDP growth, inflation and competition. It also makes it trickier, if not impossible, for China to become the world's largest economy.

Impacts

• Factory deflation squeezes the earnings of firms operating in China, especially small and medium firms, and may encourage debt take-up.
• China’s low inflation, along with depreciation, will foster global disinflation and give other central banks greater rate-cutting scope.
• Low inflation makes Chinese exports more price competitive, including those targeting high-tech/high-end segments of the global market.