Beijing Battles Deflation Amid Skyrocketing Debt Crisis

Welcome back to World Brief, where we’re looking at deflation fears in China, Germany’s efforts to lead semiconductor manufacturing in Europe, and a troop deployment along the Polish-Belarusian border.

Beijing’s National Bureau of Statistics announced on Wednesday that consumer prices on the mainland fell by 0.3 percent in July for the first time in more than two years. Although that may not sound like a lot, the decline warns of broader deflation, a fear that could drastically hurt the Chinese economy at a time when Beijing is already suffering from a high debt crisis.

Deflation is when a nation faces long-term falling prices at the expense of households’ net worth. The Chinese government, however, has been downplaying deflationary fears. “Generally speaking, there is no deflation in Chinese society and there won’t be in the future,” Fu Linghui, a National Bureau of Statistics official, said on July 17.

Now, though, it’s becoming harder for Beijing to refute evidence of deflation. Both food and car prices have dropped in the past several months, with the latter largely due to intense discounting amid price wars in the auto industry. Real estate has taken a beating; across 100 Chinese cities, the prices of homes have dropped an average of 14 percent from their peak in August 2021, and rents have fallen around 5 percent. Exports have declined as has domestic demand for Chinese-made goods.

“The reality looks increasingly grim,” economist Eswar Prasad told Foreign Policy via email, suggesting that “the government’s approach of downplaying the risks of deflation and stalling growth could backfire and make it even harder to pull the economy out of its downward spiral.”

This is far from the first time that China has battled deflation in recent years. Beijing managed to avoid dropping prices during the 2009 global financial crisis as well as the 2012 period of weak demand in Chinese goods. However, China’s struggle to recover from its strict zero-COVID policies, which ended almost eight months ago, may hinder its ability to counter deflation entirely. Still, Chinese officials aren’t giving up hope yet. Last Monday, Beijing issued local governments a list of measures to implement to try to pump more money into the economy. These included scrapping entrance fees at scenic sites to promote tourism and offering subsidies to people who trade in older cars for newer models or renovate their homes to improve energy efficiency.

Not everyone is ready to help drive greater investment in China, though. On Wednesday, the United States announced a new executive order banning private equity firms from investing in sensitive Chinese technology. Specifically, direct investments in semiconductors, quantum computing, and artificial intelligence would be prohibited. Violating these rules could lead to fines and being forced to divest of one’s stakes.

• Here’s How Scared of China You Should Be by Stephen M. Walt
• Niger’s Coup Is a Turning Point for Africans by Howard W. French
• NATO’s Northern Flank Has Too Many Weak Spots by Alexander B. Gray

Germany’s chip ambitions. The Taiwan Semiconductor Manufacturing Company (TSMC) committed $3.8 billion on Tuesday to the building of a factory in Dresden, Germany—its first such plant in Europe. The planned $11 billion facility—a joint venture with three European tech firms, as well as support from the German government and European Union—is part of a broader push to increase chipmaking supply chains on the continent.

Berlin is hoping this new deal will help Germany lead the charge in doubling the European Union’s semiconductor capacity by 2030, a bid it made in April when the EU passed the European Chips Act. In June, Germany began that process by signing an agreement with U.S. chipmaker Intel to receive a subsidy package worth $10.9 billion to create a factory in eastern Germany. By solidifying ties with TSMC and Intel, Berlin believes it can pivot the continent away from relying on high-tech imports out of the Indo-Pacific.

Border tensions. Poland isn’t taking any chances. On Wednesday, Warsaw announced that it will send 2,000 troops to its shared border with Belarus—double the number initially requested by the country’s Border Guard. The deployment seeks to hinder illegal crossings catalyzed by Russia’s war in Ukraine as well as ensure greater stability in the region. Belarus remains the only European nation to actively side with Moscow in the war.

Poland’s decision came after Belarus began military exercises near the border this week, worrying Polish officials that Russia’s paramilitary Wagner Group seeks to attack Poland despite Belarusian President Aleksandr Lukashenko saying he continues to restrain Wagner fighters from doing so. Lukashenko initially invited Wagner forces to Belarus last month after the group’s leader, Yevgeny Prigozhin, led a failed coup against the Kremlin on June 23.

Rainbow allies. The World Bank took a stand for LGBTQ rights on Tuesday when it announced that it will not consider new loans for Uganda after Kampala passed an anti-gay bill in May. “Our goal is to protect sexual and gender minorities from discrimination and exclusion in the projects we finance,” the organization said in a statement, adding that the nation’s law “fundamentally contradicts the World Bank Group’s values.”

Although the Ugandan bill doesn’t criminalize people who identify as LGBTQ, the legislation says anyone engaged in “aggravated homosexuality”—which consists of sexual relations involving people with HIV, minors, or vulnerable populations—could receive the death penalty. Attempted aggravated homosexuality is punishable by up to 14 years in prison.

Canada is fighting climate change one belch at a time. In the central province of Manitoba, dairy farmers are selectively breeding cows to emit less methane, one of the world’s biggest sources of greenhouse gas. Genetics experts hope to decrease the country’s dairy herd methane emissions by 1.5 percent annually—and up to 30 percent by 2050. Way to make the planet a cleaner, less smelly place.

Correction, Aug. 10, 2023: A previous version misstated the countries where the TSMC operates factories.