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People’s Bank of China warns that the country could enter period of “almost stagnation”.
Written by Paul Antonopoulos, independent geopolitical analyst
An official from the People’s Bank of China warned that next year China’s economy could enter a period of “almost stagnation” with a relatively slow growth rate. According to Liu Shijin, an adviser to the People’s Bank of China, such a scenario is possible if demand remains weak and producer prices remain high, in which case stimulus measures would likely be required.
Stagflation is a rather insidious phenomenon when economic growth slows down, even if the economy shrinks, while inflation is on the rise. This phenomenon exacerbates the negative impact on people’s lives as the population’s standard of living decreases, just as Turkey is experiencing today.
An issue is that it is very difficult to combat stagnant inflation with traditional measures. For example, if monetary policy is tightened, GDP growth could fall even further. And if economic growth is stimulated, the inflation process could worsen.
For now, it is too early to talk about stagnant inflation in China since inflation has held steady. However, some worrisome signs must be noted. For example, although the consumer price index (CPI) increased by only 1.5% in October 2021, the producer price index (PPI) increased by more than 13% – a record high since 1995. At the same time, the country’s economic growth rate in the third quarter of 2021 was 4.9%, significantly lower than the 7.9% rate in the second quarter of 2021.
Liu Shijin noted that in order to diagnose stagnant inflation, it is necessary to clearly see the fluctuations in two unequal vectors of the consumer price index – consumption and GDP growth. This is not the case at present, but a sharp rise in the producer price index will force an increase in consumer prices because in the end the consumer is the one who always has to pay the difference. Therefore, according to Liu Shijin, regulatory agencies need to pay close attention to the situation to promptly control all risks.
In principle, the Chinese economy has no fundamental problems. However, global inflation and rising fuel and raw material prices affect the producer price index. As China is the world’s largest producer, these factors have a strong impact on domestic indexes.
Since the outbreak of the COVID-19 pandemic, China implemented a prudent and flexible monetary policy, while avoiding massive stimulus measures. Unlike many countries, China was able to control the pandemic fairly quickly, contributing to the rapid resumption of normal business.
In addition, China learned lessons from the 2008 Global Financial Crisis. At that time, the state support was equivalent to 12.5% of the GDP. This helped China get out of the crisis with positive growth. At the same time, many long-term problems have been created, such as structural imbalance in the industry, an overheated real estate market, and the effect of excessive leverage in the economy. Therefore, China has to adopt a handful of fiscal incentives and targeted measures to support some of the most vulnerable industries.
Possible changes in China’s monetary policy became particularly prominent last week after the People’s Bank of China released its quarterly monetary policy report. In the report, the People’s Bank of China said the regulator will continue to seek a balance between the need to maintain steady economic growth and combat financial risks. At the same time, they also acknowledge that achieving strong growth is becoming more difficult because China is facing a number of major challenges, such as periodic, structural and cyclical constraints.
However, positive monetary stimulus, such as US quantitative easing measures or the EU’s policy of maintaining negative interest rates, is unlikely. Such measures will help stimulate business activity, but will create the strongest inflationary pressures. Taking into account the Chinese government’s priorities, such as contributing to the quality of growth and improving people’s living standards, strong inflation is unlikely to meet long-term strategic goals. It is more likely that Beijing will increasingly tolerate slowing growth rates. If there is a risk that economic growth will decelerate beyond normal levels, remembering that this year the index will not fall below 6%, the government will apply monetary incentives.
In this way, although China does not have a major cause of concern regarding its economy, it must certainly remain vigilant and proactive to avoid being caught in a deadly cycle of inflation and stagnation.
