THE CHINA SYNDROME: How China’s economic pain will help US Fed rate cuts.

Asia’s largest economy, not long ago considered a contender to supplant the US, is having a rough patch. Growth has struggled after the pandemic,foreign investment is waning, and real estate companies are failing. But the most pernicious development has been deflation. When consumer prices posted a small decline in July, the figure was seen as a blip. It hasn’t really let up and January showed the biggest drop since 2009.

The risk is that traders are so focused on Federal Reserve Chair Jerome Powell that they dismiss what Pan Gongsheng, his counterpart in Beijing, is contending with. That would be a mistake. The longer China refrains from meaningful efforts to arrest deflation, the greater the risk it becomes entrenched — and all the tougher to escape. Citigroup Inc. economists were prescient when they warned in May of a “confidence trap.”

The opening of China’s economy, its entrance into the global labor pool and the World Trade Organization are widely considered to be seminal events.

They were critical to the low-inflation regime that prevailed pretty much everywhere in the decades prior to Covid. China may once again prove pivotal — this time in eclipse. It will help drive inflation down from levels authorities around the world remain less than enthusiastic about, despite a pronounced retreat since mid-2022.

China exported deflation for 20 years in the form of ever-expanding exports of cheap consumer goods. Now it might be coming again in a totally different form.