During deflationary episodes, lending slows down considerably.
Let's turn to the 2020 edition of Robert Prechter's Conquer the Crash:
The psychological aspect of deflation and depression cannot be overstated. When the trend of social mood changes from optimism to pessimism, creditors, debtors, investors, producers and consumers all change their primary orientation from expansion to conservation. As creditors become more conservative, they slow their lending.
Indeed. lending has markedly slowed in China's retail sector.
Read this excerpt from a Dec. 29 South China Morning Post article:
Borrowing by China's already struggling retail sector "fell off a cliff" at the end of this year, with small firms also still struggling to access credit amid a weak recovery in consumer spending, according to a new report.
Loan-rejection rates in the retail sector increased to 38 per cent in the final quarter of 2020 from 14 per cent in the third quarter, according to the latest quarterly report from China Beige Book International, which conducts an independent survey of different aspects of the Chinese economy.
Rejection rates for small and medium-sized (SMEs) businesses rose to 24 per cent in the final quarter from 14 per cent in the third quarter, but the rate for microenterprises fell to 16 per cent from 30 per cent.
In contrast, rejection rates for large firms rose marginally to 12 per cent from 10 per cent during the same period.
"Retail borrowing fell off a cliff in quarter four, due in large part to skyrocketing loan rejections. This occurred despite some of the cheapest rates [for those that could borrow] in almost a decade. SMEs are similarly getting cut out of the buffet line," the report said.
Deflation is also showing up in China's consumer prices.
As the South China Morning Post article also points out:
China's headline consumer inflation dropped into negative territory in November for the first time in 11 years.
Here's a chart from the article: