China struggles with deflation and looming trade battle

Deflation in China is becoming increasingly difficult to reverse.

If the world's second-biggest economy's prices continue to decrease for a seventh straight quarter, they will tie the record deflationary stretch set during the late 1990s Asian financial crisis.

Beijing gets ready for a trade battle with Trump's return to the white house.

Chinese officials have used some of their most blunt rhetoric in years to commit to doing more to support growth and prevent price drops.

A 60 per cent tax on Chinese goods, as promised by the US President-elect, would weigh heavily on both the countries.

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So, what is deflation?

When consumer prices decline broadly, this is known as a price slump. This is driven by a decline in demand. And that is what is happening in China.

A real estate downturn has eroded consumer confidence and spending power. That, in turn, has weighed heavily on demand.

Why is it proving so hard for China to fix the demand problem this time around?

President Xi Jinping has resolved to redirect the economy towards new development drivers like cutting-edge technology.

Policymakers are hesitant to return to the tried-and-true methods of constructing infrastructure and manipulating the housing market. As a result, stimulus measures have been kept relatively modest.

Investors still have a fairly gloomy view of the economic future. The record low yield on 10-year government bonds is an indication of the pessimism.

(With inputs from the agencies)