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China is dealing with deflation. Falling prices could be a sign of economic trouble

STEVE INSKEEP, HOST:

Now, the economies of the United States and China are not at all on the same page. The U.S. recently faced the problems of a growing economy, like inflation or worker shortages, and the economy is generally strong here. China has begun to suffer deflation, meaning that many prices are falling. And while high inflation is bad, deflation also can be a sign of economic trouble. Zoe Liu is a China expert at the Council on Foreign Relations, and she joins us from New York. Welcome to the program.

ZOE LIU: Thank you, Steven, for having me.

INSKEEP: I want to sort this out for laymen. One basic cause of deflation, falling prices, would be that demand for products is down. So people have to drop their prices. What is dropping demand for Chinese products?

LIU: So the weaker demand comes from both domestically and internationally. On the one hand, as we observed here in the United States and in Europe, broadly speaking, there is - there has been a rising trend of inflation, hence the Federal Reserve and other central banks have been trying to calm inflation by rising interest rate, and that have ripple effect on demand. And then inside China, that's a really consumer confidence problem.

INSKEEP: Oh, well, let's talk about each of those separately. I think you're telling me that interest rates are up in the United States, and so the United States is buying less Chinese stuff. Is that where you're going with that?

LIU: Yes. And actually, we - you also see this in the data as well. Last month, U.S. import from China actually declined by more than 20%. And on top of that, there is also rising geopolitical tension between the two countries.

INSKEEP: Oh, I wonder how much of a factor that is. A lot of U.S. companies, with the encouragement of the U.S. government, have been looking for alternative sources for their products - going to Vietnam, going to Taiwan, any number of other places to try to replace Chinese imports. Is that having a measurable impact on the Chinese economy?

LIU: I would say yes. But in order for the long - in order for the U.S. companies to actually fully diversify away from their supplies from China, it actually would have to take much longer time than what we would have imagined. So I would say at this moment, the effect would be actually not as significant as we would anticipated.

INSKEEP: Of course, because the two economies are so intertwined.

LIU: Exactly.

INSKEEP: You also mentioned domestic demand. Are Chinese consumers buying less?

LIU: Yes, Chinese consumers are buying less - in particular, durable goods such as, you know, cars and all that. And part of the reason is because on the one hand, their income growth for the past five years have been declined - has declined. And then on the other hand, obviously, there is this phenomenon of price decline because of - such as, you know, Tesla and the Chinese domestic carmakers, BYD - the price war causing falling car prices. And that is going to cause consumers to imagine, well, you know, if everybody is trying to cut their prices, maybe car prices next month is going to be lower. Hence they would cut down their - or delay their current expenditure.

INSKEEP: I just want to note for people. You said Tesla - they make electric cars. BYD - that is an electric carmaker in China. You're saying they're having a price war. That itself is fascinating - there's a price war driving down the price of electric cars at this point. But I want to ask a big-picture question here. People have assumed that in the next few years, China will become the world's largest economy. Now we hear news of economic trouble in China. We hear news of deflation in China. The population is beginning to decline in China. Is it beginning to seem possible that their economy instead will stall out?

LIU: I would argue that it's really going to be dependent upon how the politics in China plays out. And if we learned anything from the rise of China, we - the key message is that Chinese government needs to stick with the policy of reform and open up and don't change that. That is a message sent out by Deng Xiaoping. However, what we observed is that Xi Jinping actually changed that. So it's going to be dependent on the politics.

INSKEEP: Xi Jinping, the current president, with different policies than Deng Xiaoping, a leader from years ago. Zoe Liu of the Council on Foreign Relations, thanks so much for taking the time.

LIU: Thank you, Steven, for having me.

INSKEEP: She is the author of "Sovereign Funds: How The Communist Party Of China Finances Its Global Ambitions."

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