Meanwhile, consumers respond to weaker income growth by tightening their belts, which further depresses demand and worsens the deflationary cycle.

Meanwhile, falling prices in China are helping to quell inflationary pressures worldwide, as Chinese producers cut prices on export goods in a bid to boost offshore sales.

As a result, prices of Chinese exports – ranging from higher value-added goods such as electric vehicles, batteries and solar panels through to lower value-added products such as household appliances, furniture and clothing – have been falling at their fastest clip since the 2008 financial crisis.

And this is helping to ease inflationary pressures in developed countries.

In its latest Statement on Monetary Policy, released last week, the Reserve Bank noted that “inflation remains above central banks’ targets in many advanced economies, but has declined further and, in some cases, faster than expected”.

It added that “the easing in inflation has been largely driven by energy and core goods prices”. In contrast, “core services price inflation has eased more gradually but remains elevated”.

So, can central banks expect China to continue exporting deflation to the rest of the world?

It certainly appears likely that falling Chinese prices will continue to dampen inflationary pressures worldwide this year.

Houze Song, a researcher at the US think tank MacroPolo argues that the Chinese economy will continue to struggle in the first half of 2024 as the key drivers of growth – investment, consumption and exports – face even more daunting challenges.

As a result, he expects Beijing will set a growth target of 4.5 per cent for 2024, compared with 5.2 per cent last year.

Song argues that the protracted hard landing in China’s real estate sector – property sales fell 23 per cent in December 2023 year-on-year – will inevitably crimp private investment.

But, he argues, “what’s more concerning is the unravelling of the local debt problem that will affect investment even more”.

Although Beijing’s financial support briefly helped stabilise local government finances last year, Song expects they will again deteriorate in the first half of 2024.

This is because Beijing is insisting that local governments pay interest on their borrowings (although it has allowed them a temporary delay on principal repayments).

At the same time, however, Beijing won’t allow local governments to borrow more to repay debts because that would only add to their debt burdens.

And this leaves local governments in a perilous financial position.

Song estimates that without extra borrowing, local governments face an annual 2 trillion yuan ($US416 billion) cash shortfall, and will have no choice but to slash spending.

At the same time, Song points out that Chinese consumers are again tightening their belts and boosting their savings. Although the household savings rate fell for two quarters last year, it bounced back strongly in the final three months of 2023 to be 4 percentage points higher than it was in the same period of 2019.

This suggests “that Chinese households drawing down their savings reflected one-off factors, such as spending on travel over the summer of 2023, the first summer since the pandemic Chinese citizens could travel freely”.

Song adds that another reason for the rise in the savings rate is the threat to household income growth from the slowing economy.

“Compared to pre-pandemic levels, Chinese household income growth is down by 2 percentage points.

“Continued household consumption weakness suggests it will contribute less to growth in the first half of 2024.”

Finally, Song argues that Chinese exports also face major challenges this year.

“With the exception of electric vehicles (EV), solar panels, and Russia – which have dominated headlines – China’s total exports actually contracted by 5 per cent in 2023,” he notes.

“The so-called ‘new three’ (EVs, battery and solar panel) exports and exports to Russia increased by $US37 billion and $US34 billion respectively in 2023.”

But, he points out, growing protectionism in major advanced economies represents a risk for Chinese EV and solar exports.

At the same time, the rapid expansion of exports to Russia in 2023 has likely run its course given that Chinese products accounted for around 40 per cent of Russian imports at the end of last year.

But Song doesn’t expect Beijing to shift to a pro-growth stance any time soon.

Instead, he says, “the combination of growth headwinds and continued inaction on stimulus means that China’s growth for 2024 will likely end up being U-shaped.

“In other words, both growth and local government debt will deteriorate in the first half of 2024, which would provide a wake-up call for Beijing to take more action, including potential bailouts to local governments, to materialise in the second half of 2024.”