China's deflation may help BD economy with cheap supplies

China's prevailing deflationary economy may somewhat help stimulate Bangladesh's economic relation as it largely depends on raw materials, and intermediate and finished goods from the world's second-biggest economy, analysts say.

Producer price index (PPI), consumer price index (CPI) and GDP deflator-all fell into deflation territory in China-making up a broad-based deflation in its economy.

The PPI dropped below zero in late 2022 and stayed negative for the past 16 consecutive months. The CPI has been negative since last October, and was only -0.8 per cent year on year in January. The core CPI has been under 1.0 per cent in the past 22 months. And the GDP deflator, the broadest macroeconomic measure of domestic prices, was -0.5 per cent y/y in 2023 and -1.0 per cent in Q4/23. The deflation is broad-based.

Industrial overcapacity in the giant economy and weak household demands are cited as the culprits of deflation.

While deflation is slowing the Chinese economy, it is helping to reduce the inflation in other parts of the world, including Bangladesh, through cheaper Chinese exports, according to economists and businesses.

Most of the local industrial outputs, both for export and domestic markets, are based on imported inputs mainly from China, according to them.

They argue that the economic slowdown in China has made raw materials and intermediate goods cheaper.

"First of all, the manufacturing enterprises will get goods at cheaper rates during this time of deflation which may help spur it," says Dr. Ahsan H. Mansur, executive director of Policy Research Institute of Bangladesh or PRI.

China is the biggest trade partner of Bangladesh and the bilateral trade was worth Bangladesh Taka 2.3-trillion-plus ($20.64 billion) in 2022-23.

Dr Mansur observes its widespread impact on the economy and predicts that the steep inflation here may fall in the coming months.

"There are competitive prices of Chinese goods available. We should not have huge volume at a time as prices may fall further," the economist says.

The history of deflation is that it takes time to stabilize. The Japanese economy had fallen in such trade since 1989 and it took at least 30 years to overcome from it. And the great depression in the USA in the 1930s also took around eight years to rebound.

In economics, deflation is far worse than inflation. "Inflation is unjust and deflation is inexpedient," said John Maynard Keynes, one of the most influential economists of all time.

Dr. Zahid Hussain, an independent economist of Bangladesh, also feel that such deflation will have favourable impact on Bangladesh's exports.

Around 87 per cent of Bangladesh's total imports consist of materials for consumer goods and capital goods and a significant part of it comes from China.

He says: "Deflation is expected to leave a notable positive impact on Bangladesh's economy, especially its exports".

But, some economists have said growing appreciation of the greenback against Bangladeshi Taka is a problem.

Dr M. Masrur Reaz, CEO and Chairman of the Policy Exchange of Bangladesh, says exchange-rate volatility is very much important. "IF the exchange rate remains unfavourable, then we will not be able to cash in on the deflation."

Dr Masrur notes that Bangladesh has long been trading with China but it has become multidimensional and stronger since 2016.

China is now the largest import destination for Bangladesh as the country's manufacturing sector largely depends on imported raw materials and intermediate goods from China.

The deflation in the Chinese economy indicates a slowdown of industrial throughput, which would have an impact on the availability and prices of Chinese products. So it might raise the import costs by creating a scarcity of goods.

The economist says the cash flow of many Chinese companies would be weaker because of the economic slowdown and it, ultimately, could affect the FDI (foreign direct investment) inflows.

But there is a positive outcome that Bangladesh can cash in on: the global value chain-oriented factories that are in operation in China may look for destinations that have higher returns.

"Of course, Bangladesh, which has higher returns, may attract them."

If the deflation persists for a more extended period, it might cause lower demand and slower consumption in the Chinese economy. So, the sector having immense export potential to the Chinese market would face a setback as it would hold back its prospects. There is another flip side -- once China starts aggressive marketing, the local clothing sector may face troubles, he notes.

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