China Could Be Headed Towards Deflation

Image via Flickr by Martin Abegglen

China has always had one of the fastest growing economies — up until recently, a large chunk of the clothes and products sold in big chain stores came with the label, “Made in China.” However, things have been slowing down for China’s economy since 2009. This raises concerns that their economy could be headed for deflation. In December 2014, China’s inflation reached 1.5 percent, which was a five-year low.

Economists in China are asking for stimulus programs to ward off threats of deflation. Liu Li-Gand and Zhou Hao, ANZ economists said, “We expect inflation to remain low in the coming months with concerns over deflation risks continuing to rise.” One possible program is to cut interest rates at banks in China to encourage new business. However, there is speculation that banks might decide to take a wait and see approach. Tax programs are another option.

Another economist, Minggao Shen, said, “We continue to argue that deflation provides more room for policy easing. Our best-case scenario is still two more rate cuts in the first half of this year and maybe three to four reserve requirement ratio cuts this year.” If the People’s Bank of China lowers their interest rates further, other banks would be obliged to follow suit.

China’s government targets a 3.5 percent growth rate in inflation each year. However, 2014 only saw a total growth rate of 2 percent. The consumer price index also fell by 1.9 percent. The biggest reason for this is that China’s manufacturing sector has slowed down. Businesses around the world are realizing that countries that are a little less developed than China can provide cheaper labor costs. That’s why the statistics bureau and economists blame the sluggish inflation numbers on low oil prices and less demand for manufacturing in China.

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