TOKYO – US Treasury Secretary Scott Bessent should be careful what he wishes for when he demands that the International Monetary Fund be a “brutal truth teller” on China.

At a business conference on Monday (May 5), Bessent urged IMF Managing Director Kristalina Georgieva to “call out countries” that “have pursued globally distortive policies and opaque currency practices for many decades.”

Though Bessent was referring to China, hypocrisy abounds as his boss, Donald Trump, pursues the most “globally distortive policies” Asia has ever seen from Washington.

And as Bessent’s Treasury team mulls, on Trump’s behalf, how to execute “opaque currency practices” that have put developing nations in a whirl. These include a possible dollar devaluation and threatening to fire the head of the US Federal Reserve.

But posterity may show that Trump’s most distortive policy of all is making Chinese deflation great again, to the detriment of global prosperity.

For two straight months now, Chinese consumer prices have been in the red. They’ve dropped 0.1% and 0.7% year on year in February and March, respectively.

More ominous, though, is that the producer price index is now down for 29 straight months. In March, wholesale prices fell 2.5%, the deepest decline in four months.

Risks are rising that China faces a “worse-than-expected demand shock” as the “economy is set to face two major drags simultaneously,” says Ting Lu, chief China economist at Nomura.

Those drags include China’s property sector troubles coupled with cartoonishly large US tariffs, currently set at 145%. As these two headwinds collide, Asia’s biggest economy could indeed be in for a shock.

Trump’s tariffs aim to torpedo China’s export engine by erasing US demand for Chinese goods. As factories go quiet and container ships get anchored in the ports off Shanghai, Shenzhen, Ningbo-Zhoushan, Guangzhou and Hong Kong, tens of millions of mainlanders will be furloughed or fired. Nor will they be receiving steady pay to spend in the Chinese economy in the months ahead.

Last month, Goldman Sachs estimated that as many as 20 million workers in China are employed by US-bound export businesses. And then there are the negative knock-on effects of unemployed factory hands. Eateries, transport operators and shopping districts that rely on workers who won’t be working could go quiet, too.

What deserves more attention with regard to mainland consumer sentiment is how the plunge in shipments from China will result in “significant layoffs” in trucking, logistics, retail and other key sectors, says Torsten Slok, chief economist at Apollo Global Management.

Zichun Huang, China economist at Capital Economics, notes that as China “is coming under pressure as external demand cools,” efforts by Xi Jinping’s government to pump money into the economy seem “unlikely to fully offset the drag.” Capital Economics thinks China’s economy will grow by only 3.5% this year, well below the government’s 5% target.

These are hardly the dynamics that an economy struggling to get households to save less and spend more wants. And yet Trump’s tariffs, and the extreme uncertainty surrounding their implementation and timing, might only intensify the deflationary currents roiling Asia’s 2025.

China’s deflation to date has been mild compared with what Japan experienced after the late 1990s. Wang Dan, an analyst at Eurasia Group, notes that Beijing officials “don’t view deflation as a crisis.” Rather, they see weak prices “as a buffer to support household savings during a period of economic transition.”

To be sure, deflation can be benign when falling prices are driven down by productivity improvements, though it’s rare and not typical of broad economic deflation. That said, China’s rapid-fire deployment of artificial intelligence across the economy could be making efficiency gains not yet apparent in total factor productivity (TFP) statistics, which have long been in decline in China.  

Economist Kosuke Motani, author of the 2010 book “The Real Face of Deflation”, notes in Japan’s case many viewed falling costs deflation as a stealth tax cut of sorts, offering households a break.

Economist Sheng-Tze Cheng at Peking University also argues that falling prices can help Chinese households by acting as a buffer in times of significant change.

Only time will tell if China is currently experiencing “disinflation” rather than a long-term trend toward deflation. Yet if Japan taught policymakers around the globe anything, it’s that deflation concerns can quickly take on a life of their own. 

That’s a problem that China must not take lightly, economists say. It’s now a growing problem for People’s Bank of China Governor Pan Gongsheng, who’s walking a tight policy tightrope.

Along with navigating the property crisis, Pan is struggling to gauge the severity of the trade-war fallout heading China’s way. Pan is also juggling President Xi’s big-picture financial priorities.

They include keeping the yuan stable, not incentivizing bad lending and borrowing decisions with excess liquidity, and avoiding a place on Trump’s “currency manipulator” list.

Xi and Pan are also trying to avoid shaking up the neighborhood in Asia. “The PBOC is only gradually, and intermittently, weakening the dollar-yuan fix in response to US tariffs, partly to avoid damaging trade relationships with non-US partners,” argues Ashok Bhundia, an economist at the Institute of International Finance.

Yet just like Japan, China is learning the hard way that defeating deflation requires more than just monetary easing. Even more than China needs increased amounts of yuan in circulation, it needs productive uses for the capital.

“China has reached the stage of development where domestic, not external, demand – especially in the non-tradable service sectors – should account for the bulk of aggregate demand,” says Michael Spence, an economist at the Graduate School of Business at Stanford University.

With GDP per capita of US$13,000, Spence says, “China has become an upper-middle-income economy approaching high-income status. So, the non-tradable part of its economy should be approaching the size seen in high-income countries: two-thirds of GDP.

“This means that even very strong demand for China’s exports, or strong tradable demand more broadly, could not offset a large shortfall in non-tradable demand. The barriers to Chinese growth primarily reflect weak aggregate domestic demand, largely owing to a shortfall in household consumption,” Spence said.

Unfortunately, he adds, relatively high unemployment, combined with uncertainty about the economy’s prospects, has encouraged Chinese households – already big savers by global standards – to double down on precautionary saving.

Yet, he notes that the declining value of real estate, which accounts for an estimated 70% of Chinese household wealth, is having significant negative effects on consumption.

“As the US learned after the subprime mortgage crisis of 2007-10, repairing balance-sheet damage in the household sector is no easy feat, let alone one that can be achieved quickly,” Spence says.

“Subdued real-estate activity,” Spence says, “has also affected local-government finances, which have long depended heavily on land sales and real-estate revenues. Rising fiscal distress among local governments compounds deflationary pressures.”

Analysts at Morgan Stanley write that “we expect Beijing to navigate the challenges with cautious and uneven stimulus policies: still relying on investment in emerging sectors and urban renewal, while gradually shifting policy towards consumption over the medium term.”

Economist Chen Kang at the National University of Singapore argues that Team Xi may have few tools to avoid the worst of Trump’s trade war. Over time, though, the costs will mount as rising unemployment depresses incomes and consumption, leading to long-term economic damage.

“The Trump tariffs may be the final push that sends it into deflation” that’s hard to reverse, Chen contends.

One big worry in Asia, including neighboring Southeast Asia, is that China will export waves of deflation the way Japan did, with the rising risk of deindustrializing various sectors that can’t compete on price with comparatively cheap Chinese goods.

Economist Brad Setser at the Council on Foreign Relations notes that China has been “driving a lot of deflation in the global price of traded goods.” Setser cites a “big fall” in Chinese export prices in 2023 and 2024.

Analysts at Loomis Sayles note that the “Chinese economy shows signs of green shoots. But deflation will not end in 2025. Uncertainty persists about scale and effectiveness of stimulus.”

At the same time, the bond house writes, US tariffs on Chinese products “would pose more downside risks to China’s growth and inflation outlook in 2025, likely leading to further declines in market rates, in our view.”

Many economists worry that today’s optimism about the US and China sitting down to negotiate a grand trade deal will fade as neither side proves willing to make big concessions. If so, then Trump’s whopping 145% tariffs could entrench, prompting China to increase its own 125% levies on the US.

“On paper, both capitals are waving detente flags,” says analyst Stephen Innes at SPI Asset Management. “But dig a layer deeper, and the path is still littered with landmines. China’s pledge to fight ‘to the end’ wasn’t retired – just shoved behind softer soundbites – and the ‘cancel duties first’ stick remains a non-starter for the White House.”

Dhaval Joshi, chief strategist for BCA Research’s Counterpoint, says that “Trump’s tariffs can be likened to America’s Brexit.” Just as capital fled UK government bonds, now “it will be the turn of US T-bonds to suffer the higher inflation rates and loss of privileged haven status.”

It follows that global investors may lose even more faith in the dollar and US Treasuries. As those shockwaves hit Asia, it might be even harder for China to keep deflation from taking on a life of its own.

Follow William Pesek on X at @WilliamPesek