There are economies of scale driving down costs.
This is not a controlled-for variable. Chinese internal market for manufactures has been characterized by firms pursuing high-volume, low-margin market-share strategies for basically as long as China has had an appreciable manufacturing sector. This is partially a result of state policy, and partially just because of China's sheer size in people and space. Blaming intense competition for China's current bout of deflation is like blaming a plane crash on gravity.
What has changed, then? It's the real estate sector. And when I talk about the RE decline causing deflation, I am not only talking about things like the drop in bulk commodities prices due to declining construction activity. There are several other domains affected. For instance, when people buy new homes, they want to furnish them with furniture and appliances. So a steep decline in home purchases will lead directly to a fall in demand for such items.
But the most significant is the effect of declining land sales on the financial system. The precipitous fall in new land sales since late 2021 means that the pace at which new liquidity enters the system has been dramatically reduced, because those sales were financed by bank loans, which immediately increase M2 by the amount loaned. Less liquidity sloshing around the system means lower asset price levels across the board, and THAT means less pay for "asset managers" since their compensation is directly tied to asset prices via commissions and periodic fees.
What this all means is that the 3 Red Lines have basically nuked the income of everybody involved in financial consulting or fund management of any kind, and with that the hiring levels of firms in those sectors. I am certain
@abenomics12345 can corroborate this point.
The resulting loss of income and job security experienced by people in finance and finance-adjacent industries in the wake of the 3RL naturally leads to a decline in consumption. So, we expect that traditional centers of financial activity in the mainland, like Shanghai and Beijing, would experience flat or even slightly declining consumption. Moreover, considering the broader boom in the manufacturing sector since the end of covid, we would expect relatively smaller cities with economies more centered around manufacturing specifically to see robust consumption growth, in many cases exceeding that of national GDP.
Empirical data proves this.
See
like the actual Party, about the strengths and weaknesses of the economy.
The fact is China's current macro economic trajectory is very strong. That is why there have been no majors policy pivots during the 14th five year plan period. While not perfect, industrial policy and technological upgrading efforts have overall gone very well and are likely to only get better as a massive wave of new STEM talent enters the workforce over the next decade or so. Yes, the deep structural adjustment of the housing market is painful. That's what happens when you deliberately cut off almost all credit to a sector that directly and indirectly contributed to about 30% of your entire GDP. But this has been more than compensated for by the exceptional growth in the size and technological competency of China's manufacturing sector over the past five years.
As the data shows, most of the current issues regarding consumer confidence are confined to tier-1 cities that have been hit hardest by the financial fallout of the housing correction. The solution to this is to stay that course such that consumption spending throughout the country is re-balanced away from a handful of the wealthiest mega-cities and towards a much larger number of comparatively smaller ones. This will take time, since the latter's share in consumption spending is disproportionately small. In the meantime growth is likely to be a bit slower, and inflation a bit weaker. That is okay.
Finance people can screech about this as much as they want, the NDRC is not going to change its mind.
