Global investors on notice: China facing worst deflation risk in 15 years

China, the world’s second-largest economy, is on the edge of a deflation cliff, with prices forecast to experience their fastest decline in 15 years, according to research from a global financial advisory and asset management firm, deVere.

“The latest data suggests that deflation could be becoming entrenched,” warned Nigel Green, chief executive of deVere Group.

This, he added, should be “[raising] red flags for investors globally”.

Green warned that prolonged deflation in China poses a particular threat to its manufacturing and export sectors, which are “key drivers of the nation’s economic growth, and sectors often favoured by international investors”.

China’s consumer price index fell 0.8% year-on-year in January, according to official statistics released on Thursday and cited by deVere – the fourth consecutive month of declines and the biggest contraction since 2009.

On an annualised month-over-month basis, China’s consumer prices fell 4.3%, with some of the most dramatic drops seen in food costs. For instance, vegetable prices have fallen by 12.7% while pork prices plummeted by 17.3%.

Strategists at Goldman Sachs have observed that the country’s ongoing property market crisis – dragged down by the collapse of China’s biggest real-estate developer Evergrande – has inevitably increased disinflationary pressure. A waning property market, the analysts said, “points to a delayed reflation path for China”.

Green noted that China’s deflationary trend could also weigh heavily on commodities and industries dependent on natural resources, posing challenges globally.

“A slowdown in Chinese demand for raw materials may impact global commodity prices, affecting investors in sectors such as mining, energy, and agriculture.”

He added: “Companies relying on exports to China for their commodities may experience decreased sales, impacting global investors with exposure to these markets.”

Green cautioned investors, particularly those with stakes in Chinese tech companies and global technology funds, to brace for diminished returns, noting that these sectors face “the possibility of reduced funding and a more challenging business environment”.

He added: “Falling prices and reduced confidence may also lead to decreased demand for consumer goods, retail and housing and commercial properties as markets adjust to changing economic conditions.”

In the context of China’s deflationary challenges, the deVere chief urged global investors to reassess and potentially rebalance their portfolios.

“Diversification across various sectors, risk management strategies, and a focus on stable assets are crucial considerations,” Green said.