China’s mounting Asia exports increase regional deflation risks

China is selling more and buying less from Asia, raising the prospect of the mainland exporting deflation to the region, according to economists at Nomura Holdings Inc.

The key drivers of China’s growing exports include industrial overcapacity, particularly in green energy products, strong Asian domestic demand and an ongoing supply chain reconfiguration,” Sonal Varma and Si Ying Toh wrote in a note to clients on Friday.

“Asia’s trade relationship with China is undergoing a structural shift,” they said. “With rising Asian imports of Chinese consumer goods, China might also be exporting deflation to the rest of Asia.” 

Asia’s trade balance with China deteriorated to a deficit of $192.6 billion in 2023 — from a surplus of $24.5 billion in 2013 — a large portion of which was with India and the Southeast Asian nations of Vietnam, Thailand, the Philippines and Malaysia, Nomura said.

Seven out of nine Asian economies had trade shortfalls with China in 2023, including South Korea, which flipped to a deficit for the first time in 31 years, Varma and Toh said.

Still, China’s demand for green metals and chips has benefited Indonesia and Taiwan, they added.

Apart from the threat of deflation, there are other important medium-term implications, Nomura said, warning of rising pressure on local producers that could trigger Asian protectionism as well as a shift in investment flows between China and the rest of Asia.