China deflation can help BD economic reflation with cheap imports

Deep deflation in China offers Bangladesh prospect of economic reflation with cheaper imports, particularly of capital goods.

Bangladesh being heavily dependent on imports from the world's second-largest economy, lower import costs are believed to provide it some relief on the overall economic front.

In May 2024 alone, Bangladesh sourced over 28 per cent of its imports from China, according to the Bangladesh Bureau of Statistics.

Additionally, China is Bangladesh's largest trading partner, accounting for 18.36 per cent of stake in the country's total trade in goods as of the May report.

Deflation typically occurs when supply exceeds demand-either through excess production or a drop in consumption. In China's case, industrial overcapacity and weak household demand have been identified as the primary causes of deflation.

According to the Financial Times, China's consumer price index (CPI) increased by just 0.4 per cent year on year in September, while the producer price index (PPI) fell 2.8 per cent during the same period.

Economists note that most of Bangladesh's industrial output, for both domestic and export markets, depends on imported inputs, mainly coming from China having mass production driven by technological as well as productive forces' expeditious advances.

As deflation makes raw materials and intermediate goods cheaper, local manufacturers in Bangladesh stand to benefit from it, as a blessing in disguise.

"Manufacturing enterprises will benefit from cheaper imports during this deflationary period, which may help boost production," says Dr Zahid Hussain, an independent economist currently working with Bangladesh's White Paper Preparation Committee on the economy.

"Chinese goods are currently very competitively priced. However, we should be cautious about bulk buying as prices could drop further," he adds, on a cautious note of optimism.

Deflation, however, can take time to stabilize. Japan, for example, experienced deflation starting in 1989, and it took nearly 30 years to recover. Similarly, the United States endured about eight years of economic struggle during the Great Depression in the 1930s.

In economic terms, deflation is often viewed as more harmful than inflation.

John Maynard Keynes, one of the most influential economists, famously remarked: "Inflation is unjust, and deflation is inexpedient."

Dr Hussain also believes that China's economic depression will positively impact Bangladesh's exports. "Deflation is expected to leave a significant positive impact on Bangladesh's economy, especially its exports."

Chairman of Policy Exchange of Bangladesh Dr M. Masrur Reaz told The Financial Express that the drop in prices of Chinese goods-around 18 per cent over the past three months-was good news for Bangladesh.

"This will reduce import costs for Bangladeshi entrepreneurs," he said.

Dr Masrur said while Bangladesh's currency had been depreciated in efforts to stabilize the foreign-exchange market, China's deflation could ease the pressure as Chinese-made products now become cheaper.

He suggests that local entrepreneurs should consider locking in supply contracts for the next year or two to secure lower prices for raw materials and intermediate goods. This strategy, he says, could help offset the effects of domestic inflation.

He mentions that many domestic goods in Bangladesh are produced using Chinese raw materials or intermediate goods, and this could help reduce the stubborn inflation in the future.

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