China’s ‘unusual’ deflationary cycle worries central bank


Kevin Yao

BEIJING (Reuters) – There are many reasons for China’s central bank to ease policy amid deepening deflationary pressures in the Chinese economy, but record credit growth is limiting the range of financial support the central bank can provide. likely to

Recovery from last year’s pandemic slump in the world’s second-largest economy gained momentum in the first quarter, but upbeat headline numbers mask potential weakness in both households and external demand. increase.

“China is entering an ‘unusual’ deflationary cycle, which means deflation in the midst of an economic recovery,” said Jinyue Dong, senior economist at BBVA Research.

Despite a recovery in growth, consumer price inflation has slowed sharply, factory prices have plummeted, rate cuts to the People’s Bank of China (PBOC) or more liquidity to the financial system There is increasing pressure to

Analysts and government think tanks, however, see little benefit from doing so due to structural constraints on demand, and increased funding risk in an economy where the debt burden is almost three times higher than output. said. New bank lending in China hit a record high in the first quarter.

The central bank cut the lenders’ reserve ratio (RRR) for the first time in March this year. Analysts now expect the scale of further easing to be modest, with most not expecting major action in the near term.

“There is still room to lower interest rates and RRR, but the impact cannot be overestimated,” said Xu Hongcai, deputy chairman of the economic policy committee at the Chinese government-backed China Policy Science Association.

“There is ample liquidity, but demand has not recovered, so it makes no sense to provide more funding. This is a structural problem.”

Household consumption growth has lagged investment and manufacturing expansion for decades, a trend many economists point to as China’s key structural weakness, and is about to continue to change. There are very few signs.

Retail sales outperformed industrial output in March. But analysts say that’s largely due to last year’s low base driven by the containment of COVID-19, which has hit consumers hardest, rather than underlying household demand.

Alicia García Herrero, chief Asia-Pacific economist at Natixis, said: “A 10% increase in retail sales looks amazing, but it’s actually not that surprising because the base effect is huge. .

neglected family

The Chinese government has promised to prioritize consumer-led growth this year, but its policies so far have directed money to sectors it deems strategic, such as large infrastructure projects and manufacturing.

Bank lending in the first quarter followed a similar path.

Despite a surge in mortgages in March, new household loans, mostly mortgages and consumer loans, accounted for 16% of total new loans in the first quarter, with corporate loans making up the rest. .

The share of households is even lower than last year, when it plummeted to 18% from 40% in 2021.

Tommy Xie, China economist at OCBC Bank, said: “There is limited room for the PBOC to play a role in restoring household income expectations. A more holistic approach may be needed to restore confidence in job security. I can’t,” he said.

The labor market remains weak, with youth unemployment reaching a record high of nearly 20%. Consumer confidence isn’t at record lows, but it’s below the range set over the last two decades.

“The focus of macroeconomic policy has not yet shifted from protecting market entities on the supply side to protecting low- and middle-income households on the demand side,” in a recent report.

Worryingly for the PBOC, in the first three months of the year, the percentage of respondents who said they preferred to save was still as high as 58%, down 3.8 percentage points from the previous quarter, according to the latest survey.

New household deposits from January to March totaled 9.9 trillion yuan ($1.4 trillion), more than half the record 17.8 trillion yuan reported for the whole of last year.

As Western economies grapple with inflation, Chinese policymakers have contrasting concerns.

“Weak demand and oversupply are definitely there,” said a policy adviser who spoke on condition of anonymity.

“There is some deflationary risk,” he said.

($1 = 6.8744 Chinese Yuan)

(Edited by Marius Zaharia and Sam Holmes)

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