China’s online platforms have been inundated with conversations about deflation for the past month. A financial expert pointed out that China is not a market economy, and applying Western economics to assess it is difficult.
Deflation
On April 20, Zou Lan, director of the Monetary Policy Department of the Central Bank of China, declared at the central bank’s first-quarter press conference that there is no basis for long-term deflation or inflation in China.China’s National Bureau of Statistics also said at a press conference on April 18 that “deflation will not occur” in China.
However, the debate on the internet about whether China will have deflation has not stopped despite these official statements.
On April 21, Chinese business magazine Sunlian Lifeweek published an article titled “Is deflation coming? Why is it scarier than inflation for us?”
The article suggests that China is facing pressure from deflation primarily due to insufficient domestic demand. It warns that “relying solely on monetary easing and fiscal stimulus is no longer enough” and that continuing such policies may lead to more negative effects.
Zhao Jian, the founding dean of the Xijing Institute, a wholly-owned subsidiary of Atlantis Capital, touted in an article on April 18 that he was likely the first person to propose that China is facing the problem of deflation.
On March 24, Zhao wrote an article stating that the biggest challenge currently facing China is deflation, but that price drop is not a favorable situation for the middle- and low-income groups.
Deflation is the opposite of inflation. It means people are spending less, but there is an oversupply of goods, forcing businesses to sell goods at lower prices.
Deflation can lead to an economic recession and rising unemployment as companies cut their workforce due to low demand. Unemployment and lower income will lead to a decline in debt-paying ability, which, in turn, will trigger a banking crisis.
In Zhao’s March article, he categorizes deflation into four types: 1) income shrinkage deflation, such as high unemployment rate and declining income; 2) overcapacity deflation, such as low domestic demand and declining export orders; 3) debt recession deflation, such as residents paying off loans early and local governments falling into a debt trap; 4) sluggish expectations deflation, such as residents prioritizing saving over spending, private enterprises lacking confidence, and a significant decline in investment demand.
Regarding the widespread debate on whether China is experiencing deflation, Zhao believes their discussions mainly focus on the type of deflation caused by insufficient demand.
In the breakdown of consumer prices for March, compared to the same period last year, food, tobacco, and alcohol increased by 2.0 percent, clothing rose by 0.8 percent, household goods and services increased by 0.7 percent, education increased by 1.4 percent, culture, entertainment, and healthcare increased by 1.0 percent, while other goods and services saw the largest increase at 2.5 percent.
China’s ‘Distorted Economy’
Albert Song, a researcher at Tianjun Policy and Economic Research, told The Epoch Times on April 24 that “China is not a full market economy, it is a distorted economy under the control of the Chinese Communist Party, so it is difficult to use the deflationary and inflationary characteristics of Western economic theory to judge the current state of the Chinese economy.”Song has 28 years of experience in the financial industry in China.
‘Financial Idling’
In a previous interview with The Epoch Times on April 13, Song spoke about the issue of “financial idling.” It means funds circulate within the financial system without entering the real economy.“The phenomenon of ‘financial idling’ that I have mentioned several times is worth our attention. China’s monetary policy is already very loose, to the point that there is little room to lower the reserve requirement ratio. In the past, the stock market and real estate were two financial reservoirs. But currently, the stock market is not doing well, and the real estate market has not improved either. A large amount of excess liquidity has nowhere to go and may eventually be used for ineffective and low-return investment projects, resulting in beautiful economic data but an increasingly cold economy,” he said.
Bank of China CEO Liu Jin spoke at the Global Wealth Management Forum on March 18 and warned of the dire consequences of “financial idling.” He emphasized that finance should serve the real economy. If financial development becomes excessive and disconnected from the needs of the real economy, it can lead to an economic bubble, with excessive liquidity circulating within the financial system and an increase in financing costs for the real economy. Furthermore, financial and economic crises may be triggered if the bubble bursts.
Currently, China’s real estate market continues to decline. According to data released by the National Bureau of Statistics on April 18, real estate development investment in the first quarter of 2023 decreased by 5.8 percent year-on-year, with residential investment down by 4.1 percent.
“Excessive development in real estate has caused market saturation, and the real estate sector cannot absorb excess liquidity; this problem goes hand in hand with a debt crisis,” Song said.
