China's lesson for the world: Beijing's take on combating deflationary woes.

AuthorPu, Younghao

There has been a notable increase in concerns about global deflation. A recent economic report from the International Monetary Fund suggests that Germany is likely to join Japan in the falling-price club, which includes Hong Kong, China, and other Asian economies. Now even the U.S. Fed has been keeping interest rates at a historically low level to avoid declining prices. However, what tire IMF and many economists fail to notice is that China is already on the verge of being out of the deflation quagmire.

China has experienced a continuously falling consumer price index (CPI) since early 1998, except tot a brief recovery in 2001 due to an adjustment that included more service components in the index. The retail price index (RPI), which did not suffer from any measurement inconsistency, was firmly in the negative territory in the past five years prior to 2003. However, ever, the deflation started to ease from April 2002 onwards, and both the CPI and RPI have eventually moved back to the positive region this year. The CPI recorded a 0.6 percent increase in the first half of 2003, while the producer price index rose by 2.9 percent in the same period. Given a sluggish Asian and European economic environment, it is still too early to conclude that China has completely shrugged off the problem. Nevertheless, the country is moving in the right direction, even encountering overheating in some sectors, such as real estate.

It is widely believed that there were two causes for China's falling prices: rising productivity and an exchange rate pegged to the U.S. dollar. Policymakers and economists concluded that, because of these, China boosted its competitiveness and exported deflation, and thus should revalue the renminbi. Since both causes firmly remain, China's deflation should stay. Facts tell otherwise. The country is delivering remarkable economic performance and deflation is receding.

A simplistic view may argue that China's strong economic growth is mainly driven by fiscal stimulus spending, and buoyant exports are tied to an artificially weak exchange rate. Deflation, therefore, may return to haunt the economy once the government runs out of fiscal ammunition, external demand dries out, and the value of the U.S. dollar rebounds.

Both lines of arguments are flawed. The impact of China's expansionary fiscal policy peaked in 1998-2000, and has been diminishing since. For example, the government has been issuing RMB 150 billion worth of special bonds every year since 1998 to support the...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT