BOOM

Trending Searches

    SUPPORT
    BOOM

    Trending News

      • Fact Check 
        • Fast Check
        • Politics
        • Business
        • Entertainment
        • Social
        • Sports
        • World
      • Law
      • Explainers
      • News 
        • All News
      • Decode 
        • Impact
        • Scamcheck
        • Life
        • Voices
      • Media Buddhi 
        • Digital Buddhi
        • Senior Citizens
        • Videos
      • Web Stories
      • BOOM Research
      • BOOM Labs
      • Deepfake Tracker
      • Videos 
        • Facts Neeti
      • Home-icon
        Home
      • About Us-icon
        About Us
      • Authors-icon
        Authors
      • Team-icon
        Team
      • Careers-icon
        Careers
      • Internship-icon
        Internship
      • Contact Us-icon
        Contact Us
      • Methodology-icon
        Methodology
      • Correction Policy-icon
        Correction Policy
      • Non-Partnership Policy-icon
        Non-Partnership Policy
      • Cookie Policy-icon
        Cookie Policy
      • Grievance Redressal-icon
        Grievance Redressal
      • Republishing Guidelines-icon
        Republishing Guidelines
      • Fact Check-icon
        Fact Check
        Fast Check
        Politics
        Business
        Entertainment
        Social
        Sports
        World
      • Law-icon
        Law
      • Explainers-icon
        Explainers
      • News-icon
        News
        All News
      • Decode-icon
        Decode
        Impact
        Scamcheck
        Life
        Voices
      • Media Buddhi-icon
        Media Buddhi
        Digital Buddhi
        Senior Citizens
        Videos
      • Web Stories-icon
        Web Stories
      • BOOM Research-icon
        BOOM Research
      • BOOM Labs-icon
        BOOM Labs
      • Deepfake Tracker-icon
        Deepfake Tracker
      • Videos-icon
        Videos
        Facts Neeti
      Trending Tags
      TRENDING
      • #Operation Sindoor
      • #Pahalgam Terror Attack
      • #Narendra Modi
      • #Rahul Gandhi
      • #Waqf Amendment Bill
      • #Arvind Kejriwal
      • #Deepfake
      • #Artificial Intelligence
      • Home
      • Boom Picks
      • Can China Beat Deflation?
      Boom Picks

      Can China Beat Deflation?

      By - BOOM |
      Published -  23 July 2015 12:26 PM IST
    • Boomlive

      China deflation

      At a time of slowing economic growth and massive corporate debts, a deflationary spiral would be China’s worst nightmare. And the risk is mounting.

      The producer price index (PPI) has been in negative territory for 39 consecutive months, since February 2012.

      The growth of China’s consumer price index (CPI), though still positive, has also been falling steadily, from 6.5 per cent in July 2011 to 1.2 per cent in May 2015. If past experience is any indication, China’s CPI will turn negative very soon.

      In China’s last protracted bout of deflation, from 1998 to 2002, persistent declines in prices were the result of monetary and fiscal tightening that began in 1993, compounded by the lack of exit mechanisms for failed enterprises. After peaking at 24 per cent in 1994, inflation began to decline in 1995. But GDP growth soon began deteriorating rapidly. In an effort to revive growth in a difficult global environment and buffer exports against the impact of the Asian financial crisis, the Chinese government loosened monetary and fiscal policy beginning in November 1997.

      But it was too little, too late. By 1998, when CPI inflation began to fall, producer prices had already been declining for eight months, and remained negative for a total of 51 months, with CPI growth beginning to recover after 39 months.

      An obvious lesson is that the government should have switched to loosening earlier, and more forcefully. But this experience also underscores the impotence of monetary policy in a deflationary environment, owing to the unwillingness of banks to lend and of enterprises to borrow. The fact that loss-making enterprises were allowed to churn out cheap products, eroding the profitability of high-quality enterprises (and thus their incentive to invest), prolonged the deflation.

      Nonetheless, China eventually managed to rid itself of deflation and return to rapid economic growth. For starters, a decline in investment during the deflationary period — together with firm closures, mergers, and acquisitions — reduced overcapacity, clearing the way for investment to rebound strongly in 2002. At the same time, expansionary fiscal policy increased effective demand, while the government, backed by its strong public-finance position, was able to tackle nonperforming loans effectively, thereby increasing commercial banks’ willingness to lend and firms’ ability to borrow.

      Moreover, housing market reforms and the development of a mortgage-loan market in the late 1990s fuelled rapid growth in real estate investment, which reached an annual rate of over 20 per cent in 2000. As a result, real estate development became the most important contributor to economic growth, even as exports boomed following China’s accession to the WTO.

      The problem with the emergence of these new growth engines is that it enabled China’s leaders to delay important structural reforms. As a result, China now faces many of the same challenges it faced in the late 1990s — beginning with overcapacity.

      After 15 years of rapid growth in real estate development, this is not surprising. But that does not make it any less risky. In fact, if overcapacity is allowed to continue putting downward pressure on prices, China’s economic growth will not stabilise at a rate consistent with its potential. Instead, the economy will be pushed into a vicious spiral of debt deflation.

      At this point, the authorities could eliminate overcapacity through firm closures, mergers and acquisitions, and other structural measures. They could also seek to eliminate excess capacity by using expansionary monetary and fiscal policies to stimulate effective demand. In theory, the long-term solution would be to pursue structural adjustments that would improve the allocation of resources. But that would be painful and slow. Striking a balance between the short- and long-term approaches will prove to be a major challenge for China’s leadership.

      Complicating this effort is the fact that, unlike in 1997–2002, China cannot absorb overcapacity by stimulating real estate investment and exports. And no one knows whether the much-discussed ‘innovative industries’ can have the impact that real estate investment and exports did — not least because there is so much excess capacity in the traditional industries.

      China must do whatever it takes to avoid falling into the debt-deflation trap. Fortunately, China still has room to invest in growth-enhancing infrastructure and innovative industries. Policies to expand social security and improve the provision of public goods could support these efforts, boosting domestic consumption by allowing households to reduce their precautionary savings.

      But, at the same time China’s leadership must continue to pursue its agenda of structural reform and adjustment, even if it may have an adverse impact on growth in the short run. China simply cannot afford to continue to kick the reform can down the road.

      Mark Twain once purportedly said: ‘History doesn’t repeat itself, but it does rhyme’. China should brace itself for a period of deflation, which may be even more protracted than the last one. But, with the right approach — and a bit of good luck — China can make sure that, this time, it recovers more sustainably than in the past.

      Yu Yongding served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006. He has also served as a member of the Advisory Committee of National Planning of the Commission of National Development and Reform of the PRC.

      This article has been republished from EastAsiaForum.org.

      Tags

      businessConsumer Price IndexDeflationEconomic growtheconomyFiscal PolicyjobsPrice IndexProducer Price IndexStructural reformChina
      Read Full Article
      Next Story
      Our website is made possible by displaying online advertisements to our visitors.
      Please consider supporting us by disabling your ad blocker. Please reload after ad blocker is disabled.
      X

      Subscribe to BOOM Newsletters

      👉 No spam, no paywall — but verified insights.

      Please enter a Email Address
      Subscribe for free!

      Stay Ahead of Misinformation!

      Please enter a Email Address
      Subscribe Now🛡️ 100% Privacy Protected | No Spam, Just Facts
      By subscribing, you agree with the Terms & conditions and Privacy Policy connected to the offer

      Thank you for subscribing!

      You’re now part of the BOOM community.

      Or, Subscribe to receive latest news via email
      Subscribed Successfully...
      Copy HTMLHTML is copied!
      There's no data to copy!