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China economy
OpinionComment
David Brown
David Brown

Macroscope | Unlike US and Europe, China can keep its economy steady without rushing into lower interest rates

  • Flat CPI inflation is a mark of the Chinese government’s success in navigating the energy crisis, keeping core inflation pressures contained
  • Beijing should maintain policy stability for interest rates and the renminbi, and let fiscal reflation take the strain of economic recovery

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Customers shop at a supermarket in Qingzhou in east China’s Shandong province on June 9. China’s consumer price index was unchanged in June from a year earlier, down from 0.2 per cent year-on-year growth in May. Photo: Xinhua
David Brown
Deflation in China, or the risk of negative consumer price inflation, is no reason for Beijing to panic. If China’s headline inflation rate does dip down into negative territory or stays close to zero per cent, where it’s been stuck over recent months, it’s simply the flip side of higher energy prices unwinding from last year, a statistical phenomenon that economists call base effects, when slower price rises this year are compared with faster price gains 12 months ago.
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If anything, zero per cent price inflation is a mark of China’s success in navigating the energy crisis, keeping core inflation pressures well contained and staying competitive.

There’s no pressure for Beijing to cut and run with lower interest rates again as mainland recovery should gain traction from earlier policy eases, supporting the government drive to hit 5 per cent growth this year. Consumer and business sector confidence will pick up as global uncertainties diminish and, if there is any need for extra economic stimulus, more government fiscal reflation, especially in big-ticket public infrastructure projects, would be the best way to achieve it.

As the economy bounces back from last year’s tough Covid-19 restrictions, growth could even surprise on the upside this year, leaving the People’s Bank of China reasonable scope to keep interest rates steady for the rest of 2023.

To be fair, with China’s headline inflation rate dropping from a modest high of 2.8 per cent in September last year down to zero per cent in June this year, it’s no wonder observers are worried that the slowdown in price rises may be more to do with a fundamental lack of demand in the economy and the recovery running out of steam.
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In fact, on a relative basis, China has an enviable track record when it comes to growth and inflation performance compared with some of its major international competitors, especially in the G7 economies. China’s inflation rate may be undershooting Beijing’s 3 per cent CPI target, but it still has a better relative growth record with no chance of recession.

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