Escape debt and consume: Financial expert warns of dangerous deflationary loop in China

Escape debt and consume: Financial expert warns of dangerous deflationary loop in China

According to a report by Business Insider says Chetan Ahya, chief Asia economist at Morgan Stanley, pointing to deflationary trends in China. This deflation drives up debt, which in turn reduces consumer spending. Ahya warns of a dangerous “loop” and calls on Beijing to take stronger action to break deflation. He sees the need to focus on boosting consumption.

Deflation has an impact on real interest rates in China, which are pushed upwards. This leads to higher debt burdens, strains company revenues and leads to retrenchments. Chetan Ahya warns of a vicious circle of even weaker aggregate demand and deflationary pressures. He explains that the country's high level of debt may be what caused deflation to occur in the first place.

Ahya said policymakers need to boost consumption, for example through spending on education, health and housing. A strong pick-up in the global trade cycle and a concerted shift in the economy towards consumption are key factors that could lead to a faster transition to a healthier inflation environment.

The impact of this deflation and rising debt on the market and the financial industry is worrying. The higher debt burden and falling consumer spending could lead to a further downward economic spiral. Unless China takes more forceful measures to break deflation and boost consumption, it could have long-term negative effects on the Chinese economy and also on global trade.