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Commentary: Why low inflation in China is no cause for applause

Concerns that China's post-COVID comeback would complicate global efforts to tame price pressures now look misplaced, says Bloomberg Opinion columnist Daniel Moss.

Commentary: Why low inflation in China is no cause for applause
Commuters cross an intersection in the central business district during the morning rush hour in Beijing, Apr 18, 2023. (Photo: AP Photo/Mark Schiefelbein)

SINGAPORE: To the disappointments of China's recovery, add inflation. Rather than accelerating quickly with the dismantling of pandemic rules, as was the case in most big economies, prices are quiescent. Too much so. The dissonance points to deep challenges beneath the respectable headline growth numbers in the world’s second-largest economy. That isn't good news for anyone.

Inflation barely had a pulse in April. Consumer prices rose a mere 0.1 per cent from a year earlier, the government reported Thursday (May 11). That was the lowest in two years and below economists’ forecasts. The news was even worse when it came to the factory gate. Producer prices tumbled 3.6 per cent, reflecting, at least partly, softer commodity costs. 

This number isn't a one-time problem: Consumer price index has been retreating since the start of the year. When China scuttled COVID-zero in December, it was fair to worry whether the comeback would be too strong, complicating global efforts to tame price pressures. Such concerns now look misplaced.

LOW INFLATION IS A SIGN OF TROUBLE

How long before top officials in Beijing start citing Janet Yellen? Not Yellen, the US Treasury secretary since 2021. The Yellen of several years earlier, when in a less political role as Federal Reserve chair, she agonised over inflation numbers that were too low for comfort, despite a durable and strengthening rebound from the sub-prime mortgage fiasco. 

She called MIA inflation a “mystery”.

The US expansion then was well on its way to being the longest in history, monetary policy was still relatively loose, and the jobless rate was steadily receding. So troublingly well behaved were prices that, by 2019, her successor Jerome Powell thought it best to wait for the whites of the eyes rather than take projections of an imminent climb at face value.

To some degree, other monetary chiefs adopted the same approach. That worked well until it didn't and borrowing costs had to be ratcheted up dramatically in 2022.

Battle-scarred as they are from the assault on elevated inflation over the past year, neither Powell nor European Central Bank chief Christine Lagarde would really want the kind of numbers China reported Thursday. They are indicative of sub-par demand in at least some important parts of the economy. 

The recovery has been called lopsided: A manufacturing and export sector that's struggling with slowing global growth - chatter about a recession in the US has grown louder - and a consumer sphere that's going great guns. Key factory gauges have languished in recent months, while retail sales are robust.

AN OPTIMISTIC INTERPRETATION

The sympathetic view of this two-track economy is that China has reopened into a global rebound that was already past its prime. Chinese people are spending freely at home, without having a broader impact and that is a disappointment. 

An astute observer of the regional and global economy, the Monetary Authority of Singapore noted recently that rather than translating into a boom, the benefits will be felt most keenly inside China. At some point, according to a positive interpretation, this has to bring with it price stability.

In the meantime, there's scope - necessity, even - for the People's Bank of China (PBOC) to keep juicing the economy. An interest-rate cut is in order, if only to send a signal that officials are on the case.

PBOC Governor Yi Gang didn't seem too troubled during a recent speech to the Peterson Institute for International Economics in Washington. He observed that for the past decade, inflation in China has averaged 2 per cent, a level targeted in some way by most monetary authorities. “Two per cent is the central banker's dream,” Yi quipped.

PBOC HAS TO ACT NOW 

In a note this week, Bank of America assessed the prospects of deflation in China. While a sustained decline in prices is unlikely, inflation will remain very muted. The firm's economists note Japan’s inflation is higher than its Asian neighbour, with all the attendant risks that brings:

"It almost appears that when major central banks find it hard to tame the inflation beast, the PBOC would have ranked high on the scorecard for inflation control ... However, a central bank's mandate is not likely supposed to push inflation down as much as possible.

"When inflation is too low, the lack of confidence in consumer spending and business expenditure could lead to further growth slowdown, making deflationary expectation permanent and incapacitating monetary policy intervention. Relative to the 3 per cent target set by the National People's Congress, sub-1 per cent CPI inflation is perhaps too low."

Haruhiko Kuroda, who retired last month after 10 years leading the Bank of Japan, might agree. Kuroda often sounded like he wasn't trying to reflate an economy as much as change psychology. He often complained about a “deflationary mindset”. If Yi isn't thinking about this, he should be.

Unlike his counterparts, the PBOC chief isn't remotely master of his own destiny. The agency isn't independent and key decisions need to be walked upstairs. It may not be enough to just signal a commitment to maintaining the recovery. Some action may be needed.

It would be too bad if China let this recovery drift. The stakes are too high.

LISTEN - Money Mind: 5 things about investing in China’s maturing economy

Source: Bloomberg/fl

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