China Facing Down Specters of Stagflation With New Stimulus Measures

A man walks past the headquarters of the People's Bank of China (PBoC), the central bank, in Beijing on Sept. 28, 2018. Jason Lee/Reuters

News Analysis

At the conclusion of 2019—the Chinese zodiac Year of the Pig—China was facing economic pain arising from none other than pigs.

The 2019 swine fever crisis in China devastated its pig population, with 200 million pigs either dying or being culled, causing pork prices to nearly double from December 2018. December 2019’s consumer price index (CPI) rose 4.5 percent compared to a year earlier, mainly due to soaring food prices, which rose a considerable 17.4 percent compared to last year, according to official data from China’s National Bureau of Statistics released earlier this month.

The CPI figures were eight-year highs for China. And food prices weren’t the only culprit; consumer goods increased more than 6 percent as well.

While pork supply constraints appear to be easing, in part due to the central government opening its national pork reserve, the crisis is still causing anxiety in Beijing. The Lunar New Year holiday is especially early this year, to be celebrated at the end of January, and pork is typically a mainstay at dinner tables.

On balance, China’s official CPI was up 2.9 percent for 2019, a benign figure by today’s standards but high compared to most developed markets. Food prices in China also matter more than in other countries; it’s the largest household expense for many families. In addition, the Chinese Communist Party (CCP) leadership is likely extra sensitive to inflation, as it was a major cause of public dissatisfaction leading up to the 1989 Tiananmen Square protests.

Shades of Stagflation

The combination of high inflation and low economic growth—China recorded its worst GDP growth in nearly 30 years—is an eerie reminder of stagflation. The United States experienced degrees of stagflation throughout the 1970s, with inflation soaring into the mid-teens, high unemployment, and low economic growth.

On the surface, China shouldn’t be worried—its official growth rate of 6 percent remains as one of the highest in the world, even if that figure will be in the 5 percent range during 2020. Inflation figures, if one were to strip out food prices, remain reasonable.

But privately, CCP leaders seem more worried. Premier Li Keqiang spoke to government officials of “downward pressure” in 2020, during a speech in late December in Beijing. According to a statement released by the State Council, Li mentioned greater complexities facing China, saying that governments at every level will have a more difficult task going forward, without elaborating on specifics.

Behind the scenes, CCP officials likely recognize that economic growth isn’t as rosy as the official statistics. There’s likely also a lingering concern that price inflation may have some durability.

CCP officials are undoubtedly facing challenges on multiple fronts domestically. It’s a major reason Beijing wants to deescalate the ongoing trade war with the United States and lower tariffs on its exports and ramp up its factories. This would at least contribute some organic growth to the economy and keep workers employed while Beijing enacts policy stimulus to battle other fronts.

Stimulus Keeps Coming, but More Nuanced

The People’s Bank of China (PBoC) said in November 2019 that keeping inflation modest was a key goal even as it battles to keep economic growth rising. The central bank’s job will become an increasingly difficult one in 2020.

The CCP must tread carefully. Many stimulus measures designed to boost economic growth have the side effect of worsening inflation and elevating the risks of social instability.

The PBoC announced on Jan. 1 that it would cut banks’ reserve requirement ratio, the amount of cash banks must keep in reserve, to free up 800 billion yuan ($115 billion) to increase lending. The timing and relatively modest amount of this latest stimulus measure suggest that Beijing is desperate to prop up the economy yet doesn’t want to shout it from the rooftops.

Part of the reason for the RRR cut is to inject liquidity into the economy leading up to the Lunar New Year, a period of greater demand for cash.

The central bank recently announced another under-the-radar change intended to spur growth. PBoC in early January mandated that banks must utilize the so-called Loan Prime Rate (LPR) as the reference point for giving out loans.

Currently, the one-year LPR sits at 4.15 percent. Previously, loans were pegged to the central bank’s one-year benchmark lending rate as a reference, which hadn’t moved since Oct. 2015 and is at 4.35 percent.

Banks do have leeway to add or subtract from the LPR to mirror the risk of individual loans.

But by amending the reference point to a slightly lower rate, the PBoC has, in effect, cut borrowing rates without officially announcing it as a rate cut.