For the Chinese consumer, getting around, communicating, and having a drink all got cheaper last month as food-price increases slowed. Factories paid less for inputs across the board? So it's all good, right?
The danger lies in the denominator.
While slower price increases and outright declines can help wallets in the near term, the risk is that companies start trimming wages or cutting staff to preserve their pressured profit margins. And while prices stagnate or fall, debt keeps piling up.
"The main danger of low inflation is how it affects the denominator of debt ratios,'' HSBC economists wrote in a note this month. "Falling producer selling prices could lead to
cost cuts elsewhere such as in workers' wages, potentially setting off a negative price-wage spiral.''
The following chart from McKinsey illustrates China's debt risk:
Charlene Chu, the former Fitch Ratings Ltd. analyst known for her warnings over China’s debt risks, said last month that the dangers are increasing with the "biggest debt bubble that the world has ever seen," as the outlook for the nation’s growth deteriorates.