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Deflation risk dangerously close
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CHINA is dangerously close to slipping into deflation, the central bank’s newspaper warned yesterday, highlighting increasing nervousness in policy-making circles as a sputtering economy struggles to pick up speed despite a raft of stimulus steps.
The article, published in Finance News, quoted the secretary-general of the China Urban Finance Society Chan Xiangyang as saying that risk of deflation is greater than many appreciate.
The society is a national academic group not directly affiliated with the People’s Bank of China, but in many cases the publication of such pieces in the central bank’s newspaper indicates tacit approval of the message.
As a slowdown in China’s economy over the past year was accompanied by a chill in global demand, Beijing has stepped up measures to prevent the country from stumbling.
In November, the PBOC startled markets with an unexpected interest rate cut — the first since 2012 — and then followed up with a cut to banks’ required reserve ratio in early February.
Analysts have said the PBOC will be forced to increase aggressive easing steps in the coming months if price and credit data continue to drift lower.
Chan said the deteriorating macro-economic environment, combined with enduring industrial overcapacity, widespread speculative and inefficient investment, and slowing foreign capital inflows are all weighing heavily on prices.
That risks setting off a debilitating deflationary cycle in the world’s second-largest economy, similar to the “lost decades” experienced by Japan under similar — but not identical — circumstances that began in the 1990s, in which inexorable price declines discouraged investment.
Chinese policy-makers and market participants have been trying to determine to what extent China’s weak prices are driven by domestic factors, including demand from Chinese consumers and industrial overcapacity, as opposed to a globally weak price environment.
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