In the latest episode of Macro Markets, analyst Marcel Pechman argued that deflation in China, which economists believe is an issue, would leave short to mid-term adverse impacts on Bitcoin, commodities, as well as stocks that rely on global economic growth.
"It will certainly not be fun to hold stocks that happen to depend on global economic growth or simply use too much financial leverage," Pechman said.
"And probably not a good time to hold commodities. So expect a short to mid-term negative impact on Bitcoin if China's growth dissipates."
Last month, China experienced deflationary conditions for the first time in two years, indicating a potentially concerning new phase in its struggling economy.
According to the official consumer price index, Chinese consumer prices dropped by 0.3% in July compared to the previous year.
By excluding volatile food and energy prices, core inflation actually rose to 0.8% in July, the highest level since January, up from 0.4% in June.
The data release paints a gloomy picture for China, as the economic recovery loses steam due to various issues, including declining exports, record-high youth unemployment, and a stagnant housing market.
China is also facing falling prices across different sectors, including commodities like steel and coal, as well as essential consumer goods like vegetables and appliances.
This is in contrast with the global trend, where many countries are grappling with rising inflation after easing Covid-19 restrictions.
The concern lies in the potential entrenchment of the expectation of falling prices, which could dampen demand, exacerbate debt burdens, and trap the economy in a cycle that is difficult to escape using traditional stimulus measures employed by Chinese policymakers.
Deflation poses a particular risk for countries with high levels of debt, such as China, as it increases the cost of servicing that debt and may discourage borrowing, spending, and investment.
“The reality looks increasingly grim,” Eswar Prasad, a Cornell University economist who once headed the International Monetary Fund’s China division, told The Wall Street Journal.
“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.”
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