If China’s growth is so strong, why is inflation so weak?
For many observers, it can appear perplexing that with China’s booming economic growth, underlying inflationary pressure could remain so stubbornly low. China is in the midst of a period of unprecedented growth in many areas, yet inflation levels remain historically low. So if China’s growth is so strong, why is inflation so weak? In this article, we’ll explore the current economic dynamics of China, and ask the question, how long can this status quo be maintained?
1. Understanding the Chinese Economy: Investigating Weak Inflation Despite Strong Growth
China’s Increasing Purchasing Power and Growing CPI
The Chinese economy is known for its impressive growth, but what often goes unmentioned is its equally impressive current level of inflation. Out of the world’s major economies, China is perhaps the only one to have recently enjoyed robust growth while still managing to keep inflation under control.
One of the reasons for this low inflation rate is the continuously increasing purchasing power of consumers. As incomes rise and Chinese wages become more competitive on the world market, people are increasingly flush with cash, meaning they can purchase more goods, which helps keep prices down. At the same time, a variety of strategic policies have been introduced by the Chinese government to reduce inflation, such as:
- Limiting the amount of imported goods
- Weakening the yuan to offset overvaluation
- Increasing interest rates
These factors combined with a growing Consumer Price Index (CPI) help foster a stable and low inflation rate. As evidence, the People’s Bank of China reported that the CPI increased by 2.7% in 2018 and is projected to continue rising in the future. This figure is roughly in line with the annual increase since 2013, so it appears inflation is not just under control, but steadily increasing in tandem with economic growth.
2. Examining the Causes of Far Below Target Inflation in China
In understanding why China has long struggled with below-target inflation, it is important to consider the various factors that have attributed to this challenge. There are several primary elements influencing the country’s prices, from government policies to trade effects.
- Government Policy – The government’s efforts to prop up its economy have caused deflation through a decrease in commodity prices. Intervention from the central bank has also proven countering, as it has long aimed to maintain low interest rates and currency stability, discouraging people from consumer activity.
- External Factors – China’s international presence means that deflationary forces operating in global markets can spread to its economy due to slipping demand and currency. In addition, external trade issues facing regional competitors, such as the US–China trade war, can also take a toll.
- Demographic Patterns – China’s aging population has unsurprisingly effected its economic landscape, contributing to below-target inflation as economic growth has failed to keep up with population dynamics.
Additionally, there are other forces at play, such as weak rural–urban income convergence and lack of monetary coordination between local authorities and the central bank. Examining all these elements is essential in recognizing why China has continuously battled with its current susceptibility to deflation. Identifying the cause is a great first step in addressing the inflation issue.
3. How Low Inflation Could Impact Economic Performance in China
- Impaired Purchasing Power – Though a low level of inflation is ideal, China could suffer from diminishing purchasing power if prices remain too low.
- Costlier Exports – With a weakened domestic currency, exports of Chinese goods would become more expensive and therefore less competitive in global markets.
Aside from these, rising debt obligations could further hobble economic performance. Low inflation curbs wages and income growth, while corporate borrowings incur higher finance costs. Reasons for the current period of low inflation are varied, ranging from lackluster consumer demand to energy cost reductions. It could yet have adverse repercussions for China’s stock markets, with rising debt obligations and subdued consumer power.
Counterbreaks to the low inflation trend are needed. Encouraging consumer spending and stimulating production remain key considerations. By settling on a balance between adequate wages, increased investments and investment returns, China could alleviate its current predicament. Other measures include maintaining a healthy rate of loan growth and freeing up liquidity in the banking system. Improved governmental regulations could further help to nurture a growthoriented environment.
4. Seeking Solutions to Revive Inflationary Pressure in China
China’s high-inflated economy has made it difficult for the country to stay competitive. For the past few years, the sluggish inflation rate has hurt the country’s growth potential, leaving many businesses and citizens struggling with rising costs of living. To stimulate the economy and reverse the deflationary trend, it’s essential for the Chinese government to take decisive action and take advantage of innovative strategies to address the issue.
- Lowering Interest Rates: Lowering the interest rates could encourage businesses to increase their business activity and investments. Additionally, reducing the interest rates may lead to increasing aggregate demand, which would increase overall economic activity.
- Introducing New Tax Breaks: Encouraging businesses to spend by offering favorable tax breaks can also be a useful way of stimulating the Chinese economy. By offering businesses deductions for expenses related to purchasing capital equipment and starting new operations, the government can encourage businesses to start investing again.
- Boosting Export Demand: Stimulating export demand by relieving pressures from the export sector is essential for China to revive its inflationary pressure. Relaxing export regulations and offering incentives to businesses that support exports can renew China’s domestic demand and return the economy to its prime.
In the end, it is essential to develop and implement sustainable economic plans that utilize long-term solutions to revive inflationary pressure in China. By taking these steps, the country can create economic stability and effectively counter deflationary trends that have been hampering growth. It seems as though there may be more to the story than meets the eye when it comes to China’s economic growth and inflation. Ultimately, it remains to be seen what underlying factors will affect the course of China’s economic data in the future, but one thing is certain: As China’s economy continues to chug forward, developers and investors must stay informed about the potential implications for their businesses and investments.