How to cure China’s declining consumer prices divides opinion as deflation signs deepen
- Economist Steven Ng-Sheong Cheung saying that China should target a yearly inflation rate of 6 per cent as soon as possible triggered a backlash
- Setting a higher inflation target does not necessarily mean that there will be ‘excess’ money in the markets, while it also raises the risk of asset bubbles, analysts said
What should China do to tackle declining prices? That is a question that has generated heated exchanges among economists and analysts as the world’s second-largest economy struggles with slowing growth and dangerously low inflation.
Producer prices, which are measured at the factory gates and heavily driven by the cost of commodities and raw materials, also dropped by 3 per cent in November and have remained in negative territory for the past year.
Larry Hu, chief China economist at Macquarie Group, estimated that the consumer price index (CPI) may only rise by 0.3 per cent in 2023, much lower than Beijing’s target of “around 3 per cent.”
Beijing has resisted so-called flood-like stimulus – large scale monetary and fiscal expansion – often a textbook response to slow growth and low inflation.
Comparisons have been consistently drawn with Japan, which experienced two so-called lost decades of stagnant growth and deflation after its real estate and asset bubble burst in the early 1990s.
Economist calls for China to stimulate activity with controlled inflation rate
Cheung pointed out that falling property prices had already affected wealth among Chinese homeowners, and that deflation would be “disastrous” for the economy.
His blog post, published on December 8 on Chinese social media platform Weibo, triggered a backlash among the general public and analysts.
By raising its inflation target, critics said, China’s central bank would need to increase the size of its balance sheet and inject new cash into the economy, adding to the risk of asset bubbles.
“If we really push inflation to 6 per cent as proposed [by Cheung], without supplementing it with other means to stabilise inflation expectations, it may be difficult for people to believe that inflation will only stop at 6 per cent,” Bank of China International chief economist Xu Gao said in a blog post on Sunday.
Xu said that low inflation in China is a “symptom” largely driven by the inability of property developers and local governments to raise funds.
Financing conditions remain difficult for Chinese property developers, some of which have already defaulted on their debts, while some local governments have been directed by Beijing to curb borrowing as a result of their already high leverage.
Lu Gan, associate professor at Central University of Finance and Economics, argued that setting a higher inflation target does not necessarily mean that there will be “excess” money in the markets.
“Once the central bank’s policy efforts lead to the realisation of inflation expectations and speed up money circulation, there is no need to issue too much money, it will flow from some channels to the overall economy,” Lu said in a blog post on Monday.
And property developers and local governments are not the only channels for credit growth, Lu argued.
Banks no longer rely on the two groups as key customers, Lu said, citing his own research on lenders.
Li Xunlei, chief economist with Zhongtai Securities, suggested that the government can try to set a lower limit for price targets.
Monetary policy could turn more accommodative in the face of deflationary risks
“In the past, 3 per cent CPI has been set as the upper limit. In the future, a lower limit of no less than 1 per cent can be set, which will help raise expectations,” Li said on Monday.
It was the first time that the top leaders had discussed a “price target” in the tone-setting meeting, according to Macquarie Group’s Hu.
“In other words, monetary policy could turn more accommodative in the face of deflationary risks, implying more policy rate and reserve requirement ratio cuts to come in the months ahead,” Hu said last week.
