China must spend $1.4 trillion to avoid deflation

China must spend $1.4 trillion to avoid deflation

In the next two years, China should spend about 10 trillion yuan, or 1.4 trillion dollars, in order to avoid deflation, recover the economy and return it to sustainable growth, according to Morgan Stanley experts.

The stimulus, which would be up to 2.5 times larger than the “bazooka package” that China brought in after the 2008 global financial crisis, should focus directly on households through social assistance, rather than investment and infrastructure.

They warn that there is not much time for action. The more entrenched deflation is, the more it will cost to eliminate it with stimulus measures. Their estimates underscore the extent of the challenges facing China’s policymakers as they try to revive growth in the world’s second-largest economy, writes the Financial Times.

“The longer deflation lasts, the greater the demand in terms of fueling inflation,” said Robin Xing, chief China economist at Morgan Stanley.

Huge surplus of unsold buildings

In light of the prolonged downturn in the housing market, households cut spending and increased savings, with the seasonally adjusted savings rate in the second quarter at around 31 percent, according to Goldman Sachs.

Authorities in China have responded to weak consumer confidence by pumping loans into the industrial sector, relying on manufacturing and exports to sustain the economy, but the real estate market still has a huge surplus of unsold properties.

At the same time, Beijing’s move led to an increase in the supply of consumer goods at a time of low demand, further exacerbating deflation.

China is targeting real GDP growth of 5 percent this year, but economists say deflationary pressures are hitting nominal growth, which was 4 percent annualized in the second quarter, reducing corporate profits and leading to layoffs and wage cuts.

If China does not intervene in the direction of stopping the pressure of falling prices, deflationary pressures will push real growth to around four percent this year and next, writes the FT.

Source: Business diary

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