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Desperate Discounts? How China’s Export Woes Are Fueling Domestic Deflation
As U.S. tariffs choke off overseas sales, China is dumping excess inventory at home, driving deflation fueled by desperation, not innovation.
Falling prices may seem good for consumers, but for Chinese sellers, it means shrinking profits, rising debt costs, layoffs, and an economic squeeze.
Why it matters: As excess inventory (that can’t find buyers abroad via tariffs) floods a domestic market already plagued by weak consumption, it’s fueling deflation not from innovation or efficiency, but from desperation. Prices are falling because firms are slashing margins to try and move product and stay afloat, deepening the very economic fragility that China has dealt with for years.
Now the Deep Dive: Without the U.S. market to offload excess goods, China’s deflation problem is deepening — prices are falling, not from innovation or efficiency, but from desperation. Companies are cutting prices to move products, and it’s exposing a deeper problem: a dangerous mismatch between oversupply and anemic demand.
Now you might think, “Aren’t falling prices good for consumers?”
PPI (Producer Price Index): Measures wholesale inflation (what suppliers pay).
CPI (Consumer Price Index): Measures consumer inflation (what they pay)
Just take a look at the chart below.
When PPI is higher than CPI (yellow bar positive), manufacturers can pass rising costs to consumers. But when PPI falls below CPI (yellow bar negative) — like now — it signals a profit squeeze as companies face rising input costs but can’t raise retail prices because there’s no demand - thus leading to layoffs, bankruptcies, and economic malaise.
Aka if the spread is negative for an extended period, it suggests that manufacturers (producers) are struggling.
Now, China has dealt with this before (a few times, actually).
But in the past, they could mask domestic weakness by exporting their surplus of goods abroad. But now, tariffs are blocking that escape route. So, they’re flooding the domestic market instead, cutting prices further to survive.
At first, dumping unsold exports at home looks clever. But when it becomes a strategy, it’s a liability. It breaks pricing power, weakens earnings, and triggers another round of cost cuts — all in an economy already drowning in debt and overcapacity.
Beijing has hesitated to stimulate demand directly (by handing cash to consumers). But with deflation deepening, they may be forced to (although I think it would have limited benefit at this point).
Watch this closely because it’s not just China’s problem. Other export-heavy economies may be next.
Figure 1: MacroMicro, May 2025
Debt, Trade Wars, and Housing Bubbles: Is Canada on the Brink?
The Bank of Canada warns that a prolonged global trade war could lead to more Canadians missing mortgage payments than during the 2008 financial crisis — potentially bursting the nation’s housing bubble.
Canada’s dangerously high household debt — with consumers owing $1.73 for every dollar of income — leaves the country highly vulnerable to economic shocks.
Why it matters: Canada is caught in the middle of a massive debt-fueled housing bubble, with consumers heavily leveraged. The longer a trade war drags on, the greater the risk for Canadians, as potential job losses and slowing growth could trigger a housing bust.
Now the Deep Dive: I’m not here to pick on Canada, but we need to take a closer look at what’s going on.
I believe there are two major risks looming over the Canadian economy right now:
Businesses Overexposed to U.S. Exports Are in Danger.
Companies that live and die by U.S. exports- especially in manufacturing sectors like transportation equipment and primary metals - are in the danger zone.
Out of the 15 top U.S.-exposed subsectors, 12 are in manufacturing - sectors that are getting hit hardest by tariffs.
Businesses that export a large share of their production to the U.S. and have high debt, low profitability, and weak cash reserves are particularly vulnerable.
This means lost jobs, shrinking incomes, and struggling businesses in these industries.
Canadian Households Are Deep in Debt.
Canada’s household debt-to-disposable income ratio is 173% at the end of 2024. That means for every dollar of income, Canadians owe $1.73. (That's not sustainable.)
Thus, further delinquencies could trigger a debt and housing crisis - possibly even a banking crisis (although that’s speculation).
Meanwhile, there’s evidence that Canada’s once-hot housing bubble is deflating as an affordability crisis deepens.
So, the warning signs are there. Canada’s economy is increasingly strained, and the longer these trade disputes continue, the worse things could get.
Thus, if our northern neighbors can’t rein in their debt during a trade war, Canada might become the world’s most polite economic cautionary tale.
Figure 2: Bank of Canada, Dunham May 2025
Taiwan Dollar Soars to 1988 Highs: A Warning for Exporters and Insurers
Taiwan’s currency experienced its sharpest surge since 1988, triggering panic among exporters and insurers deeply exposed to U.S. dollar-denominated assets.
This unexpected appreciation is prompting Taiwanese financial giants to hedge dollar exposure despite high costs and is sparking calls to rethink Taiwan’s export-reliant economic model.
Why it matters: A stronger Taiwan dollar can erode the competitiveness of Taiwanese exporters by making their goods more expensive abroad, while also straining insurance companies with increased liabilities on foreign-currency policies. The sudden and unexpected surge has triggered concerns about market volatility, threatening the island's export-driven economy.
The core thesis was simple. These foreign “financial whales” hold a massive pile of U.S. dollars and U.S. assets. Thus, if the dollar weakens and U.S. markets fall, they bleed. (Click here for more context).
Well, a few days later, Taiwan proved it.
As of Tuesday, its currency (the Taiwanese dollar; $TWD) surged higher against the U.S. dollar — its sharpest surge in nearly four decades.
Why? Because Taiwanese insurers hold over $700 billion in overseas assets — more than half in U.S. dollars and U.S. markets.
This is why that matters. . .
You’re a Taiwanese insurer investing in U.S. stocks.
You convert Taiwanese dollars to U.S. dollars.
If the dollar strengthens, your returns grow when you convert back.
But if the dollar weakens? Your gains get eaten into.
Now these financial giants are becoming more likely to hedge their dollar exposure — but hedging costs are brutal, nearing 15%.
And a stronger Taiwan dollar? It’s a blow to Taiwan’s exporters — a key driver of growth and government cash flow. This shock has already triggered calls to rethink Taiwan’s export-driven model, echoing Japan’s painful experience in the 1980s (which I wrote about two months ago).
But this isn’t just Taiwan’s crisis. It’s a warning. Because when a rising currency slams into massive foreign exposure and export-driven economies, the fallout could be brutal.
I don’t think this ends with Taiwan. Other major surplus countries could see their currencies surge too — and feel the same pain.
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