Cross-posted from Investing in Chinese stocks.
Caixin: Is China Knocking on Deflation’s Door?
Yu Yongding, a CASS professor, recommends that China adjust its economic structure and that the government take a cautious approach to economic stimulus. Under the current structure, Yu said, banks prefer to issue low-risk, high-return loans to state-run companies. That means any policy that increases the money supply effectively supports state-owned assets, but does little for the rest of the economy.
And there’s no guarantee that a greater money supply will lead to more lending. CASS’ Zhang said banks have not significantly stepped up lending as a result of recent money supply injections by the central bank. Nor have they been swayed by relatively low inter-bank lending rates.
Zheng Jingping, deputy director at the NBS, said the government should reduce financing risks by balancing its monetary easing policy against the need to address local government debt and industrial overcapacity.
“The current problem is that the easing of monetary controls cannot be translated into credit supply,” Zheng said. “Interest rate and reserve requirement cuts are still needed. And an interest rate cut would be better.”
The government’s goal “during the process,” said Zheng, “is to push forward structural reforms.”
That’s been the theme here for a couple years now.
If the government wants to force lending into the economy, the American approach is decent: slash taxes and issue treasury bonds to make up the difference. Reduce taxes on income and capital, and let the market sort it out.
Is deflation really a problem though?
Other economists say there is never a need to fear deflation as long as CPI is rising. In particular, they argue, unless pork prices fall there is no reason to entertain deflationary fears since, as a dinner table staple in China, pork is a key factor in CPI data.
Officials such as Yi are also downplaying the deflation threat. “If only measured by CPI, China has not seen deflation,” Yi said at a May 23 conference with economists.
Zhang Ping, deputy director of the CASS Institute of Economics, said CPI statistics alone should not be used to determine whether deflation is affecting the economy. That’s because the economy is more closely tied to manufacturing and investment than consumer spending. Zhang thinks PPI data should be factored into any analysis of deflationary trends.
But Liu Xiangyun, the central bank’s research bureau deputy director, said PPI can be volatile and is seldom used around the world as an indicator of deflation. Liu said that commodity price and currency exchange rate factors have caused the PPI to fall in Japan even during periods of high GDP growth.
China has a lot of bad debt, but to this point, deflation is mainly the result of falling commodity prices and the appreciation of the renminbi. The threat of worse deflation looms, but aside from a few high profile examples, it hasn’t really shown its face yet.
