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Chinese banknotes: “Aggressive measures” demanded

Photo: Johannes Neudecker / dpa

In China, prices fell more sharply at the beginning of the year than they had in more than 14 years. There are now concerns in the country about deflation, which could drag down the economy.

Specifically, consumer prices fell for the fourth consecutive month in January, according to data from the National Statistics Office (NBS). At 0.8 percent, the decline was the strongest since September 2009. Experts had only expected a decline of 0.5 percent.

The situation seems explosive: While high inflation is weakening consumers' purchasing power in most industrialized countries, deflation in China is encouraging consumer restraint and can set in motion a devastating downward spiral.

Because: If consumers hold back over the long term in anticipation of further falling prices, the entire economy will be dragged down in a whirlpool of falling prices, falling wages and reluctance to invest. "China must quickly take aggressive measures to prevent deflationary expectations from taking root among consumers," said Zhiwei Zhang, investment expert at Pinpoint Asset Management.

Will interest rates be lowered further?

Since the end of the Corona containment measures at the end of 2022, the People's Republic has had difficulty returning to the strong economic period before the pandemic. In addition to the ongoing real estate crisis at home, exporters' problems are also weighing on the economy.

Last year, US President Joe Biden even called China a “ticking time bomb” because of its economic weakness. Recently, however, China's economy has grown robustly again. The world's second-largest economy grew by 5.2 percent in 2023 - even exceeding the government's growth target.

However, there was a sell-off on the Chinese stock exchanges due to the unresolved real estate crisis and the debt risks of local governments. The leadership in Beijing recently took a stand against the development: state-backed investors expanded their share purchases. At the same time, the authorities limited net sales and short sales of funds, for example.

The official 2024 economic growth target is expected at the opening of the National People's Congress. The central bank had recently reduced the reserve ratio for commercial banks (RRR) by half a percentage point. The reduction will release around one trillion yuan (the equivalent of around 128 billion euros) in liquidity for the financial system.

The central bank should provide even stronger monetary policy support, said economist Carlos Casanova of private bank Union Bancaire Privee. »We would prefer to see broad-based interest rate cuts in February. But that remains unlikely given the lack of monetary policy leeway and the problems with the mechanism of action.

The problem for the central bank is that interest rate cuts intended to stimulate the economy could accelerate the fall in prices. Experts point out that a large part of the loans flows into the infrastructure sector and also into excess capacity, which could build up further deflationary pressure.

April/Reuters