Is China Flooding the World with Deflation? The Truth Behind the Economic Data || Digging into China

Hi, I'm Dong Shong. Welcome to Digging into China, where we explore China in depth to reveal unique perspectives. Recently, you may have noticed that China's economic data for May disappointed many observers. Expectations were high and China and the US had just paused a new round of reciprocal tariffs. Logically, American importers should have rushed to stockpile goods, spurring a rebound in China's exports and strengthening overall economic performance. Yet, the reality fell short. China's exports in May grew by only 4.8% yearonear, a mere 0.2% increase from April. Exports to the US continued to decline sharply and the anticipated stock parting surge never occurred. Compounding this, domestic CPI and PPI kept falling with deflationary pressures pro proving increasingly persistent. The central bank's latest financial data for May also underperformed the market's expectations. While the bank has been injecting liquidity with M2 growth soaring, most social financing stems from government activity. While private sector credit is actually contracting year on year. In short, the situation can be summed up in one word, deflation. Meanwhile, US Treasury Secretary Bessant has once again criticized China. During a recent congressional hearing, he labeled China the world's most imbalanced economy, accusing it of relying on exports to rescue its economy and in doing so exporting deflation globally. Bessent has made this claim repeatedly. China is spreading deflation worldwide. This raises a critical question. Is China truly exporting deflation? and does it have the capacity to export deflation to the US? Today we will dissect the reasoning behind this export deflation narrative. Let's start by examining May's financial data. Social financing is a leading indicator offering clues about China's economic trajectory for the second half of the year. This year's social financing structure is clear. Growth is driven largely by net issuance of government bonds. However, this raises a concern. Can the government sustain this level of borrowing indefinitely? Can it issue trillions in bonds each month year round? Clearly not. China's government operates under strict annual bond issuance quotas with more bonds typically issued in the first half of the year and fewer in the second half. This prompts another question. Who will drive social financing in the second half of 2025? Businesses are stagnant. Consumers are cautious and the loan demand is weak. Are we to expect some extraordinary intervention? Loan data from April and May already signals a looming social financing crisis in the second half of the year. New loans in these months were lower than last year's, a decline from prior quarters. While banks may have pushed for a strong first quarter, their lending capacity is now visibly strained. By the third and the fourth quarters, banks will likely focus on reserving resources for next year's first quarter, further dampening lending enthusiasm. So, where will the additional social financing came from? This is the first major warning sign for social financing. Next, consider M1. Since the central bank revised its calculation method, M1 figures have improved slightly, but its growth still trails far behind M2s. The bank can refine its methods, but fabricating M1 outright is challenging as it can be verified through other metrics. M1 growth hinges on two factors. First, corporate profits. If profits aren't rising, where would additional M1 come from? Only when profits fuel expansion do firms borrow generating M1. Second, government tax revenue depends on the same logic. Without corporate profits, how can tax revenues grow? Thus, to gauge where the M1 is truly rising or if economic vitality is rebounding, we cannot rely solely on central bank figures or optimistic claims from the statistics bureau. We must cross track M1 trends with changes in corporate profits. China's deflationary environment is now deeply entrenched. By May's end, M2 grew 7.9% year on year and the social financing rose 8.7%. Despite this substantial monetary injection, CPI remains negative and the PPI is falling sharply. This points to a critical issue. Demand is severely lacking. The central bank is releasing liquidity but much of it flows to government entities. While government bond issuance bolsters social financing, these funds are largely directed toward fixed assets with a rapidly diminishing returns. The government's extensive inefficient investment act like a black hole absorbing funds without generating meaningful market demand. Recently, I came across an anecdote online about a small city in China's southwest border region with a population of just 1 million. The chairman of the local urban investment company was arrested and authorities uncovered a 40 million UN in bribes cash he had buried in a hole back in his hometown. Doesn't this illustrate a black hole for government funds? How many such cases exist across China? Calling these inefficient investments is an understatement. They are often negative return projects where investments yield losses. This brings us to the key question. Is US Treasury Secretary Bessence correct in accusing China of using exports to revive its economy and exporting deflation globally? Objectively, he's partly right. Two decades ago, China's flood of inexpensive goods to the US did devastate many American businesses. Today, however, China struggles to export deflation to the US. Instead, its impact is felt most acutely in developing nations like India, Brazil, Indonesia, and South America. South Africa, sorry. These countries share a common challenge. Their nent manufacturing sectors are struggling to gain traction. When China unleashes a deluge of cheap goods, these nations are forced into price wars with Chinese products. The data tells the story. India's CPI in April 2025 was just 3.16% near a 5-year low. In May, retail CPI dropped to 2.82%, the lowest in nearly 6 years. Why? China's exports to India surged this year with electronics, batteries and solar products growing by over 25%. India industries like steel, electronics and textiles have postponed have protested price undercutting prompting the government to initiate anti-dumping probes against China. Similarly, Brazil saw a 35% year-on-year increase in imports from China in the first quarter. This crushed the profits in its domestic appliance and construction material sectors, leading firms to pressure the government for tariffs, threatening to halt investments otherwise. Brazil has imposed a 25% tariff on Chinese steel. Yet, it still cannot stem the tide of Chinese steel flooding its market. A leading Brazilian steel company publicly criticized the government, warning it might abandon a 4 billion real investment plan without stronger protections. South Africa too has suffered. Its economy has languished for years with local manufacturing nearly obliterated by Chinese competition. Between 2023 and 2024, South Africa imposed the tariffs as high as 120% on Chinese cement, tiles, steel, and fans to shield its industries. So, is China exporting deflation? Undoubtedly, but to whom? Primarily to developing nations whose industrial foundations are still fragile. The US, however, is a different story. Decades of globalization have hollowed out American manufacturing. Today, US inflation is driven not by goods but by services. No matter how many lowcost consumer goods China exports, it cannot reduce US health care costs or labor expenses. That's the reality. Thus, Besson's claim that China is exporting deflation globally is most accurately framed as China exporting deflation to developing countries, not the US. This is rooted in the structure of a US CPI. Consider this. Despite warnings that a tariff war would trigger runway US inflation this year, inflation has consistently fallen below expectations, remaining remarkably subdued. This underscores that Chinese goods have minimal influence on US inflation. Americans primary concerns aren't a shortage of affordable Chinese products, but persistent high rents, exorbitant health care costs, doubling insurance premiums, and unaffordable labor. Service sector wages and labor costs drive the US inflation. To be frank, China is indeed exporting deflation globally, but this pressure targets manufacturing primarily industries and low-end consumer goods markets. The US inflation battle, however, has shifted to domestic services. This explains why the Trump administration confidently imposed global tariffs, betting that the falling oil prices would curb inflation. Lower oil prices reduce transportation cost offsetting tariffdriven price hikes and their effect is more pronounced. Reflect on this. During Biden's presidency, US inflation soared yet the administration did not lower tariffs on China to address it. Why? The impact would have been negligible. So when Bassants condemns China for exporting deflation and relying on exports to revive its economy, his true concern isn't Chinese goods flooding US markets. Despite his rhetoric about safeguarding global market stability or dignity for workers worldwide, the reality is straightforward. He fears China using low prices, vast capacity and the scale to deflate the manufacturing sectors of developing nations. Consider the implications. Chinese products are inexpensive and their technology is advancing rapidly. How can countries like India, Brazil or South Africa with their emerging industrial base compete? The outcome is growing dependence on Chinese goods and manufacturing. Once China's exports dismantle their local industries, it's no longer just about the trade. It's about controlling industrial rhythms, supply chains, and pricing power. At that point, the global projects, whether building factories, producing electric vehicles, or constructing power grids become reliant on China for raw materials, equipment, technology, and the capital. This transcends deflation. It's about China's leveraging its supply chain to dominate globally. Should the West lose industrial leadership, technical standards, environment metrics, and financial valuation systems could follow suit, the US's push for chip alliances, and green agreements is at its core an attempt to use regulation to counter China's production capacity. The most concerning aspect of a basson sustainment isn't exporting deflation, but the deeper fear of China re-anchoring global supply chains and reclaiming manufacturing dominance. This is why the US seeks to curb China's exports and relocate supply chains. Domestic inflation by comparison is a minor issue, a view shared across US political parties. In this US China contest, tariffs are secondary. It's a high stakes wager. China is betting it can clear inventories, capture markets, and secure market share through exports before a fiscal crisis erupts, positioning itself as a global price anchor. By binding more developing nations to its manufacturing ecosystem, China could delay domestic economic pressures or even find the room to recover. The US, meanwhile, is betting it can rally allies to contain China, shift supply chains, and address critical vulnerabilities before China's industrial edge fades. Take rare earth. The US isn't incapable of producing them, but historically relied on China for cost and environmental reasons. Now recognizing the risk, it's rebuilding domestic processing capacity, a process that may take one or two years. If the US can endure, China's rare earth leverage will win. Ultimately, this contest hinges on two prevails. Oh, this contest hinges on who prevails, China or the US. Thank you so much for watching. If you find this video helpful, please like it, drop a comment below, and hit the subscribe button right here. It really helps YouTube suggest my video to others. I'll be back with more content soon. Until then, be well.