How can China remedy deflation risks without ditching long-held economic strategy?
- Prudent monetary moves and an emphasis on restructuring local government debt have sparked debate over how long it will take policymakers to ‘walk it off’
- Meanwhile, the pitfalls of a potential liquidity trap are deepening as bank deposits rise from consumers and investors hoarding cash, curtailing policy impacts
Persistent risks of deflation and a weakened banking sector may compromise the effectiveness of China’s monetary policy, and such lingering threats could dash hopes for a sustained recovery in trying economic times, according to analysts.
The People’s Bank of China is widely expected to embrace further policy-easing measures to shore up growth. But with low inflation, insufficient demand and the possibility of the US Federal Reserve holding firm on high interest rates, there are growing questions about how far those policy moves can go without significantly changing how Beijing manages the economy.
The International Monetary Fund has warned of risks from overstretched lenders and developers, and it has urged Beijing to find new means of maintaining economic growth, beyond relying on construction and other industrial investments.
China’s banking sector has so far borne the brunt of the debt burden. S&P Global Ratings projected that the non-performing assets ratio for Chinese commercial banks would rise to 5.75 per cent in 2026 from its estimate of 5.55 per cent in 2023.
The US rating agency also expects more restructuring of local government debt at China’s commercial banks, and such moves could weigh on their capital and earnings in the coming months.
The Bank of Guizhou, a significant lender to the local government of Guizhou province, said its non-performing ratio of real estate loans in 2023 saw a year-on-year growth of 20.18 percentage points to 40.39 per cent, according to a filing with the Hong Kong stock exchange on March 28.