China has Western economists baffled

By Rhod Mackenzie

China has achieved what its global competitor, the United States, has also attempted, albeit with mixed results and significant costs, and an uncertain forecast. They have successfully managed to tackle inflation, which had already been at a very low level for many years, without resorting to draconian measures by the People's Bank of China. It could be argued that if anyone should use such measures, it would be China. To write about this, if not as an achievement, then to consider the situation from different angles (which is not unambiguous), Bloomberg refrains from commenting, and the surveyed economists are hesitant to express their opinions. Without making any significant changes, but with a brief introduction and some clarifications, we present below a discussion of the risks of deflation that have been blown out of proportion, rather than focusing on the benefits of low inflation (we could have referred to the publications on this topic by the Central Bank of the Russian Federation). It is important to note two additional points. The Chinese economy has been growing steadily for a long time. Russia should not try to emulate it in terms of inflation, as the rapid growth experienced by Russia is also characterized by a fairly high level of inflation. Economist Dmitry Plekhanov noted in RBC that the list of anti-inflationary measures is not limited to the standard set of raising rates or introducing price regulation, but is more aimed at supporting supply.
Due to weak demand, consumer prices in China have fallen for the third consecutive month, and the threat of deflation is becoming increasingly real. Due to weak demand, consumer prices in China have fallen for the third consecutive month, and the threat of deflation is becoming increasingly real. Bloomberg has sounded the alarm.
The last time prices in shop windows and markets in China decreased for three consecutive months was in 2009, according to the agency. In December of last year, they decreased by 0.3% annually. Repeating this record 14 years later could trigger a deflationary spiral.

Selling prices have decreased by 2.7%. Furthermore, they have been declining for over a year due to falling prices for raw materials and weak demand both domestically and abroad. Exports, which have always been considered the foundation of the rapid growth of the Chinese economy, experienced a 4.6% decline last year, marking the first decrease in seven years. Although there were some signs of growth in December, the export price index hit its lowest point since 2006 in October 2023, and only rose symbolically in November.

Raymond Yeung, the chief China economist at Australia & New Zealand Banking Group Ltd, stated that 'China needs decisive action to break the deflationary cycle. Otherwise, deflation will begin.'
Raymond Yeung highlights that Chinese companies are lowering their product prices, and Chinese workers are reducing their wage demands. Yeung is one of the economists who believe that China's financial authorities will need to reduce the key rate to increase domestic demand and business confidence. Most economists surveyed by Bloomberg agree that on January 15, the People's Bank of China (PBOC), China's central bank, will cut rates for the first time since last August and inject billions of new cash into the financial system.
Markets had a weak reaction to the data regarding the upcoming key rate reduction. The CSI 300 Index decreased by 0.2%, while the offshore yuan remained little changed at around 7.17 to the dollar. The rate on 10-year government bonds also remained unchanged at 2.5%.

Food prices decreased by 3.7% in December, which is less than the previous month's decrease of 4.2%. Core inflation remained the same as in October.

According to most experts, there are several reasons for this price behaviour. The current situation involves a prolonged crisis in the construction sector, a decrease in consumer confidence, and weak exports. Falling prices are detrimental to the economy as they lead to a decrease in company income, which may result in lower wages and profits. Deflation can also increase debt pressure and cause consumers to hesitate when making purchases. The GDP deflator, one of the primary indicators of prices in the economy, decreased in the second and third quarters of last year. The GDP deflator has decreased for two consecutive quarters, which is the first time since 2015.

Chinese financial authorities have suggested that they may not only reduce the lending rate but also decrease the size of banks' required reserves. This could potentially stimulate loans.

Please note that the base rate of the People's Bank of China is currently 3.45% per annum, which is lower than the rates in the USA (5.25-5.5%) and the Russian Federation (16.0%). The rate for five-year loans is 4.2% per annum. Additionally, the interest rate for annual loans issued under the medium-term lending program (MLF) is at 2.5%. The interest rate for seven-day reverse repo operations was 1.8% per annum.

Fiscal support is also being studied in RVOS. Recently, Chinese Finance Minister Lan Foan announced that the government will increase spending this year.

The upcoming spring session of the National People's Congress (Parliament) in March is expected to announce a new economic growth target for the current year, which is likely to be no more than 5%. As the saying goes, "end of quote."