China, one of the biggest economies in the world, is experiencing its lowest inflation numbers in more than two years, according to data from the National Bureau of Statistics (NBS). The Consumer Price Index (CPI) registered a mere 0.1% increase year-over-year, down from the 0.7% registered in March. The drop in prices was caused in part by a decline in food and beverage prices, which fell from 2.4% in March to less than 1% in April. Core inflation, which does not include prices of food and beverages, rose 0.7% year-over-year. The numbers are below the expectations of the country this year, which was set to be around a 3% ceiling that is not likely to be reached.
Analysts are worried about the numbers and see them as a testament to the slow and rocky economic recovery of China after the coronavirus pandemic. However, Zou Lan, an official with the People’s Bank of China (PBOC), dismissed these concerns, stating that “there is no basis for long-term deflation or inflation,” and that consumer demand is expected to warm up during the second half of this year.
The possibility of deflation is an issue that worries many experts, which could lead to a decline in economic activity, as companies and consumers tend to hold off on purchases in anticipation of lower prices. In an attempt to prevent this, some experts have proposed the Chinese government deliver cash handouts to spur demand. Li Daokui, a professor of economics at Tsinghua University and former member of the PBOC advisory board, has called for the government to deliver cash handouts of at least 500 billion yuan to citizens. He explained that even with a conservative estimate, 500 billion yuan in consumption vouchers would drive one trillion yuan in overall consumption. The state would also receive over 300 billion yuan in taxes derived from spending directly enabled by the cash handouts, according to the professor.
Standard Chartered has explained that it expects inflation levels to hit 0% in the next few months, “as a crude-oil price spike in the first half of 2022 created a high comparison base.” Despite slow inflation levels, the bank predicts a growth rate of over 5% without adjusting interest rates, which are currently at 1%.
Experts urge the Chinese government to balance the risk of deflation with other issues, such as potential inflation if consumer demand suddenly heats up and with the country’s ongoing commitment to curb financial risks. Chinese officials are likely to continue fine-tuning their policies to keep growth on track, such as increasing bank lending, reducing borrowing costs, and boosting consumer and corporate spending. However, China needs to be careful to balance its policies to avoid financial risks while addressing the deflationary pressures caused by the COVID-19 pandemic.
Overall, the low inflation numbers in China are worrying experts, who are concerned about the potential for deflation in the Chinese economy. The Chinese government needs to balance the risk of a possible deflation with other concerns, such as keeping growth on track and avoiding financial risks. Experts have made different proposals to avoid deflation, such as the delivery of cash handouts. It remains to be seen what measures the Chinese government will take to tackle the issue of deflation and balance its policies to support financial stability and growth.
