Thursday, February 26, 2015

China dangerously close to slipping into deflation, says central bank newspaper

Feb 25, 2015

SHANGHAI (Reuters) - China is dangerously close to slipping into deflation, the central bank's newspaper warned on Wednesday, highlighting increasing nervousness in policymaking circles as a sputtering economy struggles to pick up speed despite a raft of stimulus steps.

The article, published in Finance News, quoted the secretary general of the China Urban Finance Society Chan Xiangyang as saying that risk of deflation is greater than many appreciate.

The Society is a national academic group not directly affiliated with the People's Bank of China (PBOC), but in many cases the publication of such pieces in the central bank's newspaper indicates tacit approval of the message.

As a slowdown in China's economy over the past year was accompanied by a chill in global demand, Beijing has stepped up measures to prevent the Asian economic powerhouse from stumbling.

In November last year, the PBOC startled markets with an unexpected interest rate cut - the first since 2012 - and then followed up with a cut to banks' required reserve ratio in early February.

Analysts have speculated that the central bank will be forced to take more aggressive easing measures in the coming months if price and credit data continues to drift lower.

Chan said the deteriorating macroeconomic environment, combined with enduring industrial overcapacity, widespread speculative and inefficient investment, and slowing foreign capital inflows are all weighing heavily on prices.

That risks setting off a debilitating deflationary cycle in the world's second-largest economy, similar to the "lost decades" experienced by Japan under similar - but not identical - circumstances that began in the 1990s, in which inexorable price declines discouraged investment.

Chinese policymakers and market participants have been trying to determine to what extent China's weak prices are driven by purely domestic factors, including demand from Chinese consumers and industrial overcapacity, as opposed to a globally weak price environment.

The falling price of oil, for example, which is down by over 50 percent since mid 2014, has aggravated a broader commodity price rout which has pushed down inflation in all the major industrial economies.

As the world's largest net petroleum and iron ore importer, China's industrial good prices closely track global commodities prices.

However, economists note that January's data is usually distorted by the Lunar New Year holiday.

Activity in China's mammoth factory sector edged up to a four-month high in February but export orders shrank at their fastest rate in 20 months, a private survey showed, painting a murky outlook that analysts said argues for more policy support.

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