Last week Foreign Secretary James Cleverly became the first senior British politician in five years to visit China in a bid to reset ties between the two countries after years of tension over human rights, investment, and security.

The meeting between Mr Cleverly and his host, Chinese Foreign Minister Wang Yi, came as other western countries including the United States also attempt to improve their relations with the leaders of the world’s second-largest economy. Yet his visit also drew criticism in the UK from those concerned about the failure to take a tough enough stance against a foreign power accused of seeking to control key industrial assets.

A report issued in July by Parliament’s intelligence and security committee warned that the UK has been slow to wake up to the threat as China has penetrated every sector of the UK economy.

“It is clear that China has taken advantage of the policy of successive British governments to boost economic ties between the UK and China, which has enabled it to advance its commercial, science and technology and industrial goals in order to gain a strategic advantage,” committee chairman Sir Julian Lewis said.

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“China has been buying up and seeking to control or influence the UK’s industry and energy sectors and – until the Covid-19 pandemic – Chinese money was readily accepted with few questions asked.”

Critics say the objectives of last week’s high-profile visit by Mr Cleverly remain unclear, making it impossible to assess its relative success. What is evident is that any joint efforts to boost the global economy – one of the primary objectives cited by the Chinese Foreign Minister – will be significantly more difficult as that country grapples with the threat of a deflationary spiral that would impact around the world.

Unleashed from Zero Covid restrictions, China’s economy was meant to drive a third of global growth this year. Instead, it’s facing a confluence of problems as record youth unemployment and a shaky property market have undermined consumer spending. Add flagging exports and mountains of local government debt to the mix, and serious questions are now being raised about what comes next for the country’s £14 trillion-plus economy.

Many analysts predict the most likely outcome will be a slow drift towards the likes of the “lost decade” of stagnation suffered by Japan in the 1990s, but there is also the possibility of a more severe crunch.

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Consumer prices in China flatlined in June before falling by 0.3% in July, the first negative inflation reading since early 2021 when prices were weaker as the Covid pandemic hit demand. Retailers that stocked up on goods in anticipation of a wave of “revenge spending” after pandemic restrictions were lifted in 2023 are now under pressure to cut prices as sales have slowed.

Given this past year’s surge in inflation (which in the UK is still running at nearly four times the Bank of England’s official target), the prospect of falling prices probably sounds like magical deliverance from the cost-of-living crisis to most Western consumers.

Under the right circumstances a bit of deflation can be beneficial, but if enough people buy into the prospect that things will cost less tomorrow than they do today, this triggers a downward spiral as business and investment slows. Less income for producers becomes entrenched into a negative feedback loop of higher unemployment, even lower prices, and even less spending.

In response to weakening demand, China’s factories are already charging less for their goods. Producer inflation fell by 4.4% in July, which came on top of a 5.4% year-on-year decline in June.

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The UK bought £63.6 billion of goods from China in 2021, equivalent to more than 13% of all imports. Cheaper Chinese goods will provide some relief to inflation-weary UK consumers, but it is important not to overstate the benefits as a slump in the price of electronics or furniture will only marginally impact overall prices driven higher by surging food, energy and labour costs.

At the same time, a slowdown in China could hurt exporters in other parts of the world. China is, for example, the UK’s sixth-largest export partner accounting for about £18.8bn or 5.8% of all UK goods sold abroad.

Upmarket brands such as the UK’s Burberry or Ted Baker are particularly vulnerable to any wobbles in demand from China, which is the world’s second-largest market for luxury goods following 30 years of unprecedented economic growth. China is also the largest spirits market in the world, accounting for approximately £230 million of direct exports of Scotch Whisky in 2022.

So far it’s been African and Asian exports into China that have been hit hardest, with the value of both down more than 14% in the first seven months of this year. Shipments from North America in July were also lower than in the same period a year earlier.

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Volumes of commodities such as iron on copper have held steady despite falling prices, but if the slowdown continues it would affect miners in Australia, South America and elsewhere around the world.

One positive from the UK consumer perspective is that lower demand from China could help to keep oil prices in check. The world’s biggest crude importer reported a 20.8% drop in oil imports last month as the country’s manufacturing sector entered decline.

China is stepping up efforts to revive the economy’s recovery through a variety of measures, one of which was the recent extension of loan relief for property developers to ensure the delivery of new homes under construction. Many developers stopped building houses and several weaker companies defaulted following a government crackdown in 2020 on heavily indebted real estate developers.

Slumping property values are not the sole factor weighing on China’s economy, but it is interesting to recall that it was the provision of subprime mortgages to buyers in the US that triggered the global banking crisis. Initial reports of problems in 2007 were dismissed by many British consumers as irrelevant to their daily lives, but the ensuing disruption to the flow of global credit forced the UK to bail out several banks and building societies at a huge cost to taxpayers.

When a global powerhouse sneezes, the rest of the world usually catches a cold. Let us hope this new financial contagion is of a less virulent nature.