China Faces Deflation Risk as Demand Weakens Despite Production Boom, Experts Warn

Chinese economic experts are sounding the alarm over a growing disconnect between robust industrial production and weakening domestic demand, urging policymakers to tackle deflationary risks and improve wealth distribution. The warnings come from a forum hosted by the China Macroeconomic Forum, where former and current government advisors emphasized the need to correct the imbalance between strong supply and weak demand.

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It is impossible for a country mired in deflation to achieve technological innovation.

Huang Yiping, an advisor to the People's Bank of China, cautioned that achieving technological innovation is impossible for a country mired in deflation. He drew a comparison between Japan and South Korea, noting that while Japan failed to foster cutting-edge AI companies after decades of deflation, South Korea has nurtured semiconductor giants like SK Hynix. Huang stressed the importance of adjusting the macroeconomic environment to one of moderate inflation, where producer prices are positive and companies are profitable, to foster stronger technological advancement.

Recent economic data underscore this divergence. In May, China's industrial value-added increased by 4.5% year-on-year, and exports showed a strong performance, rising 13.8% in May. However, domestic consumption indicators paint a starkly different picture. Retail sales of consumer goods decreased by 0.6% in May, with merchandise retail sales down 0.7%. Investment also lagged, with fixed-asset investment falling 4.1% in the first five months of the year.

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We need to adjust the macroeconomic environment to one of moderate inflation, where producer prices are positive and companies are profitable, so that we can become stronger and go further in technological progress.

Liu Qing, an economics professor at Renmin University of China and former advisor to the Ministry of Industry and Information Technology, also highlighted the issue of uneven distribution of benefits from the AI boom. He called for open discussions on how to share profits from AI-related industries within society, noting that such conversations are happening internationally but are largely absent in China. Former central bank advisor Liu Shijin advocated for directing over half of stimulus measures towards resolving the supply-demand imbalance and expanding social security for low-income groups, suggesting an increase in subsidies for rural and unemployed urban residents.

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We need to publicly discuss and explore how to share the profits from AI-related industries within society to prevent excessive concentration of benefits in technology.