As they say, you ain't seen nothing yet.
Students of the economy, as well as the rest of us, are about to get a birds-eye view of what a deflationary depression looks like, unfolding before our eyes, in China, in real-time.
For the past month, the whole country has literally been shut down. People have been under house arrest, effectively; offices and factories are not operating, and commerce is not happening. All that is not news. What is new is that the Chinese people are about to learn the extent of economic distress, and it will be ugly.
Tomorrow is the end of the month. Tomorrow is payday. Tomorrow, rent is due. Tomorrow, loan payments are due. Tomorrow, the Chinese will learn what happens when nobody has any money.
Most companies in China will have substantially lower revenue, and are in a cash crunch. Even those that can operate, such as office-oriented businesses where people can work from home, still face problems because they need collections from clients and customers that have no money.
For B2B businesses, invoices did not go out until late in February, and most certainly will not be paid immediately. Tomorrow, a lot of people are going to learn that they are not getting paid this month. Many others will be paid substantially reduced salaries.
Landlords will not collect rent from people that have no money. The government has already asked all landlords to forgo February rent, and cut rent by half for March and April. Whether they acquiesce does not matter, because a wide swath of people simply will not have the money to pay.
Gig workers like taxi drivers have seen incomes go to zero. China's economy is far more "gig" than ours, and those hand-to-mouth workers simply have no money. The government is likely to formally regulate what was only a "suggestion" earlier this month -- forgive and forgo rent.
Two things will happen starting next week.
The first is deflation. Already, salaries are being cut, rents are being renegotiated, expenses are being renegotiated or cut completely. Economic activity will not -- cannot resume -- until prices reflect the new reality.
Second, the Chinese government will need to offer massive monetary support across the whole economy. They will need to put money into people's hands, similar to what the Korean government has already started. A huge percentage of the Chinese population is unbanked, so the government cannot distribute money like we would, via credit. But every single person in China has Wechat, and the government can make direct support payments to individuals via WeChat pay (and to a lesser extent, Alipay). In addition to direct-to-business support, look for the government to create and distribute trillions of RMB in support payments to the populace via WeChat pay. There are few other options.
Economists fear deflation mostly because of debt. China utilizes debt far more than the West, but their debt is not the same as our debt. In China, contracts are only suggestions subject to renegotiation as soon as they are signed. "Debt" can be renegotiated far more easily than in the West. Debt will be restructured, converted to equity, or forgiven. Look for this to start in earnest next week as well.
China is about to experience the initial collapse of a deflationary depression. The Chinese New Year holiday covered it up last month.
Today is the first day of reckoning. Absent massive monetary support and a 180-degree reversal in the virus-mitigation policies, the end of March will be a second, even more severe reckoning.