President Xi Jinping speaking at the annual Central Economic Work Conference in Beijing on December 12. The confab ended without plans to jolt a slowing economy. Photo: Xinhua
Opinion
The View
by William Pesek
The View
by William Pesek
Beijing risks fiddling while China’s economy sinks further into deflation
China is in danger of making the same mistake as Japan in treating the symptoms of the economy’s descent into deflation, rather than the causes
The extreme focus on the US Federal Reserve is distracting from the real drama for global markets: how People’s Bank of China (PBOC) officials play the next few months.
It’s grand, of course, that investors think Fed chairman Jerome Powell may pull off that most elusive feat known as a “soft landing”. But the deepening deflation confounding PBOC governor Pan Gongsheng will keep any celebratory impulses to a minimum.
Statistically speaking, the 0.5 per cent year-on-year drop in China’s consumer price index last month might not seem too dire. But when seen in the context of the myriad headwinds racing China’s way, 2024 may already be something of a washout for Asian economies.
Pan’s team is contending with a massive housing bubble deflating in real time, rapid capital outflows, cratering business and consumer sentiment, elevated global bond yields and a crisis of confidence in President Xi Jinping’s readiness to stabilise things. Making matters worse, the PBOC is operating in an environment where the Communist Party is sending decidedly mixed signals.
This latter dynamic looms large following last week’s central economic work conference. In the days before the annual planned session, state media created the impression that bold stimulus moves were on the way. The confab ended without plans to jolt a slowing economy.
On the surface, this might sound pragmatic, perhaps even reassuring. It could be read as a hint that Xi’s government is optimistic about 2024 and that traders shorting Shanghai stocks might want to rethink strategies. Below it, deflationary forces are stirring in ways that suggest a dangerous level of complacency in Beijing.
Vendors wait for customers at a shop in Shanghai on August 7. China’s problem is deflation rather than price growth and forecasts suggest a wide-ranging slowdown including in credit growth and trade. Photo: Bloomberg
Students of Japan’s 1990s deflationary funk know the drill here. In Tokyo’s case, government after government promised they were on top of the falling price trends. But it turned out to be far from the case, as Japan’s political establishment underestimated the troubles a mature economy faced once deflation sets in.
The best analogy is a large vehicle whose wheels are stuck in mud. The stimulus that governments and central banks toss at the problem gain little traction. The economic wheels spin and spin.
China risks this predicament as Beijing fiddles. As Japan taught us, policymakers must act fast and with overwhelming force on different tracks simultaneously. The PBOC must add new liquidity while the government ramps up stimulus.
Even more important is government effort to get toxic assets off balance sheets. In Japan’s case, it took about 10 years of falling prices to create mechanisms to dispose of the bad loans suffocating the banking system.
16:50
Can China learn lessons from Japan’s ‘lost 30 years’?
Can China learn lessons from Japan’s ‘lost 30 years’?
China must act infinitely faster to help the property development giants weighed down by unfinished housing projects to reduce their default risks. Since property can generate 25-30 per cent of gross domestic product, there’s not a moment for Beijing to waste.
Here, the apparent lack of urgency among Xi’s inner circle doesn’t instil confidence. The same goes for the relative homeostasis at the PBOC headquarters.
Granted, China’s central bank isn’t exactly independent. Pan wouldn’t do anything drastic without a green light from Xi or Premier Li Qiang. But in a speech in Hong Kong last month, Pan spoke in uniquely blunt terms about the road ahead for Asia’s biggest economy.
“The traditional model of relying heavily on infrastructure and real estate might generate higher growth, but would also delay structural adjustment and undermine growth sustainability,” he said, adding, “The ongoing economic transformation will be a long and difficult journey, but it’s a journey we must take.”
10:57
Boom, bust and borrow: Has China’s housing market tanked?
Boom, bust and borrow: Has China’s housing market tanked?
It’s heartening to hear Pan acknowledge that China’s real estate sector is “looking for a new equilibrium” and pledge that Beijing will achieve healthy and sustainable growth of the “high quality” variety. It’s wise, too, that Pan accepts the reality that financially fragile regions in the west and north of the country may have “difficulties servicing local government debts”.
Why, then, the drip, drip, drip of suggested repairs that Beijing policymakers might, perhaps, hopefully implement in the weeks and months ahead?
Take the 25-point plan unveiled last month to reinvigorate innovation and productivity among private enterprises. While it sounds terrific, the vagueness of changes to come – and a dearth of timetables for implementation – already has investors grasping for Beijing’s next wish list of aspirational reforms that never seem to arrive.
China bulls have been waiting 10 years for Xi to make good on promises to let market forces play a “decisive” role in Beijing policymaking. The decree rang hollow in 2015 when Xi’s party threw the entire power of the state at plunging Shanghai stocks. The same with Xi’s retrograde crackdown on tech entrepreneurs in late 2020.
These self-inflicted impediments towards reducing the dominance of the state sector were costing Xi trust in global market circles before his Covid-19 blunder. The fallout from Xi’s draconian lockdowns produced something of a Wile E. Coyote moment. Property developers looked down and realised the road had disappeared.
Hence the confidence deficit Xi’s government faces at home and abroad. To date, it’s made the Japan-like mistake of treating the symptoms of China’s descent into deflation, not the causes.
Beijing must work faster to build broader social safety nets to get households to save less and spend more. It must create economic space for private businesses to disrupt the economy and produce new jobs. It must devise a stronger capital market infrastructure. It must get a handle on the fallout from an ageing population, which tends to exacerbate deflation.
In the interim, the global economy is looking at a potentially protracted period of Chinese underperformance. Worse, 2024 could be a year of adjusting to China exporting more deflation than manufactured goods.
William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades”
