China and the threat of global deflation

Global deflation could kick up a notch in the coming year, mainly due to dumping from China and India. This is from The Times of India, reiterating a New York Times article.

In the midst of the global financial crisis, an influential US daily has raised the spectre of major producers like China and India dumping products in world markets and giving America another worry - deflation, or declining prices.

As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy - the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years," the New York Times said on Saturday. "The word for this is deflation, or declining prices, a term that gives economists chills."

American economists and businessmen had hoped to export their way out of recession, but…

Earlier this year, some analysts suggested that American businesses might continue to prosper, even as consumers pulled back at home, by selling into foreign markets….. ..In past crises, like those that devastated Mexico in 1994 and much of Asia in 1997 and 1998, weak economies managed to recover by exporting aggressively, not least to the United States, the New York Times said.

"From Asia to Latin America, exports are slowing and should continue to do so as the global appetite shrinks," the Times said.

"This is spawning fears that major producers like China and India - which vastly expanded production capacity in recent years - will have to dump products on world markets to keep factories running and stave off unemployment, pressing prices lower."

But China may yet be the savior of the global economy.

China has long been at the centre of claims that the world could keep growing regardless of American troubles. China has been importing cotton from India and the United States; electronics components from South Korea, Malaysia and Taiwan; timber from Russia and Africa; and oil from the Middle East, the Times said.

Just make sure that Chinese economy does not go into a deep slide.

…many of the finished goods China produces with these materials have ultimately landed in the United States, Europe and Japan. When consumers pull back in those countries, Chinese factories feel the impact, along with their suppliers around the globe.

Brad Setser seems to have his worries in the right place.

I worry more that China’s steps to stimulate its economy won’t be vigorous enough. Right now, demand for the world’s goods seems to be falling fast…... At the margin, I would rather see China step up its imports of goods and services than continue its current pace of Treasury purchases.