China's inflation could stay low beyond 2025, says economist

Summary

The script discusses China's persistent low inflation, attributed to a cautious monetary policy and financial consolidation by commercial banks, reluctant to expand credit. Food prices are declining, and domestic demand is sluggish due to the ongoing housing downturn. Despite this, foreign orders remain robust, potentially boosted by Western central banks' rate cuts. Policymakers may tolerate some deflation for long-term structural goals, constrained by the need to maintain the yuan's value and reform the financial system. The script predicts a continued low inflation environment through 2025, with a focus on supply chain strengthening and a shift from consumer markets to industry.

Takeaways

• 💼 The speaker believes China will experience a prolonged period of low inflation due to the central bank's mild monetary response and financial consolidation in commercial banks.
• 🏦 Banks are reluctant to issue more credit, which is a factor contributing to the low inflation environment.
• 📉 Food prices are decreasing, which is another element that could be suppressing inflation.
• 🏠 The housing downturn is ongoing, which is expected to delay a meaningful rebound in domestic demand.
• 📉 Both domestic and foreign orders are declining, but foreign orders are holding up relatively well due to Western central banks entering a rate-cutting cycle.
• 🌐 This could potentially boost China's exports in the long run, providing some support to the economy.
• 💸 Policy makers may be tolerating some deflation as they see it as necessary for achieving long-term structural goals, with a high tolerance level.
• 🚫 Constraints such as the need to defend the valuation of the yuan and the need for financial system reform limit the central bank's ability to cut rates substantially.
• 🏦 Smaller commercial banks are highly exposed to the housing market, which has led to a faster consolidation and efforts to maintain financial stability.
• 📅 More clarification on policies is expected in the third Plenum, which may provide the market with a better understanding of the direction.
• 🔮 The current low inflation environment is expected to continue throughout 2025 or even beyond, according to the speaker's outlook.
• 🛑 Deflation is typically seen as detrimental to demand, but the speaker suggests that the current low inflation is a result of the housing bubble bursting and a shift in focus from consumer markets to the industrial sector.

Q & A

What is the current view on China's inflation situation?

The view is that China is experiencing permanently low inflation for the long haul due to a mild monetary response from the central bank and financial consolidation in commercial banks.

Why are banks reluctant to issue more credit?

Banks are reluctant to issue more credit because of the deepening financial consolidation and the downturn in the housing market, which affects their exposure and risk assessment.

How are food prices impacting the inflation situation in China?

Food prices are going down, which is contributing to the low inflation environment in China.

What is the expected timeline for a rebound in domestic demand?

It will be a long time before a meaningful rebound in domestic demand is seen, as the housing downturn is still continuing.

How might Western central banks' rate cuts affect China's exports?

The rate cuts by major Western central banks could boost China's exports in the long run by making them more competitive.

What is the current stance of policymakers on tolerating deflation?

Policymakers seem to have a high tolerance for deflation, viewing it as necessary for achieving long-term structural goals.

What constraints are preventing the central bank from cutting rates substantially?

One constraint is the need to defend the valuation of the yuan, and the domestic financial system's need for reform, especially considering smaller commercial banks' exposure to the housing market.

What is expected from the third Plenum in terms of financial policy clarity?

More clarification on financial policies is expected from the third Plenum, which will help the market to have a better understanding of the direction of monetary policy.

How long is the low inflation environment expected to last?

The low inflation environment could easily carry over throughout 2025 or even beyond, according to current expectations.

How severe is the deflation in China, and what are its implications for consumer demand?

Deflation is typically seen as a demand killer, but in China's case, it is a result of the housing bubble bursting and a shift in focus from consumer markets to the industrial sector, which is expected to keep inflation very low.

What is the central bank's long-term agenda regarding monetary policy?

The central bank's long-term agenda focuses on strengthening the supply chain and shifting focus from consumer markets and services to the industrial sector, which leaves limited room for monetary easing.

Outlines

00:00

💹 China's Persistent Low Inflation and Monetary Policy

The script discusses the ongoing low inflation in China, attributing it to the central bank's mild monetary response and financial consolidation by commercial banks, leading to a reluctance to issue more credit. Food prices are also noted to be declining. The housing downturn is identified as a significant factor hindering a rebound in domestic demand. The speaker anticipates that this low inflationary environment will continue, with both domestic and foreign orders declining, although foreign orders may remain relatively stable due to Western central banks cutting rates, potentially boosting China's exports. Policymakers' tolerance for deflation is suggested to be high, with constraints such as the need to defend the yuan's valuation and the necessity for financial system reform highlighted. The speaker expects more clarity from the upcoming 'third Plum' event, predicting that the low inflation environment could extend into 2025 or later.

Keywords

💡Low Inflation

Low inflation refers to a situation where the general price level of goods and services is rising at a slow pace. In the video, it is suggested that China is experiencing a prolonged period of low inflation due to mild monetary responses from the central bank and financial consolidation in commercial banks, which makes them reluctant to issue more credit. This concept is central to the video's theme as it sets the stage for discussing China's economic outlook and policy responses.

💡Monetary Response

Monetary response pertains to the actions taken by a central bank to manage the economy, typically through adjusting interest rates or the money supply. The script mentions that the central bank's response has been mild, contributing to the sustained low inflation. This is a key concept as it influences the overall economic conditions and the bank's strategy in managing inflation.

💡Financial Consolidation

Financial consolidation is the process of integrating or merging financial institutions to strengthen their stability and efficiency. The script indicates that commercial banks in China are undergoing this process, which affects their willingness to extend credit. This concept is crucial as it impacts the availability of credit and, by extension, the level of economic activity and inflation.

💡Credit

Credit is the ability to borrow money or purchase goods and services with the expectation of future repayment. In the context of the video, the reluctance of banks to issue more credit is linked to the low inflation environment. Credit is a vital component of economic activity, and its restriction can lead to reduced spending and investment, thereby affecting inflation.

💡Domestic Demand

Domestic demand refers to the total demand for goods and services within a country by its residents and businesses. The script suggests that domestic demand in China is expected to remain weak due to the housing downturn. This concept is significant as it reflects the internal consumption patterns and economic health of the country, which are directly related to inflation levels.

💡Housing Downturn

A housing downturn is a period of declining housing prices and reduced construction activity. The video script mentions that the housing downturn is continuing, which is a factor contributing to weak domestic demand and low inflation. This concept is important as it illustrates the impact of the housing market on the broader economy.

💡Export

Export refers to the shipping of goods and services produced in one country to another. The script indicates that China's exports could be boosted in the long run due to Western central banks cutting interest rates. This concept is relevant as it discusses the external factors that could potentially influence China's economic growth and inflation.

💡Deflation

Deflation is an economic condition where the general price level of goods and services is falling. The script discusses the possibility of policy makers tolerating some deflation as a necessary step towards long-term structural goals. This concept is central to understanding the video's narrative on the potential trade-offs between short-term economic stability and long-term economic restructuring.

💡Policy Makers

Policy makers are individuals or groups responsible for creating and implementing policies, particularly in the economic sphere. In the video, the tolerance level of policy makers towards deflation is a topic of discussion, highlighting their role in shaping economic outcomes. This concept is key to understanding the video's exploration of the strategic decisions that influence China's economic direction.

💡Financial Stability

Financial stability refers to the condition where a financial system is able to withstand shocks and continue to function effectively. The script mentions efforts to maintain financial stability, particularly in the context of smaller commercial banks exposed to the housing market. This concept is important as it underpins the broader economic stability and the measures taken by policy makers to safeguard it.

💡Supply Chain

A supply chain is the network of organizations, people, activities, information, and resources involved in producing and delivering a product or service. The video script discusses the central bank's focus on strengthening the supply chain, indicating a strategic shift in economic priorities. This concept is significant as it reflects the long-term goals of policy makers and their impact on inflation and economic growth.

Highlights

China expected to have permanently low inflation for the long haul due to mild monetary response from the central bank and financial consolidation in commercial banks.

Banks are reluctant to issue more credit, contributing to the low inflation environment.

Food prices are decreasing, which could further suppress inflation.

Domestic demand is expected to remain weak for a long time due to the ongoing housing downturn.

Foreign orders are holding up relatively well, potentially boosted by Western central banks entering a rate-cutting cycle.

Policymakers may be tolerating some deflation as a necessary pain for long-term structural goals.

Defending the valuation of the yuan is a constraint, limiting the ability to cut rates substantially.

Domestic financial system needs reform, with smaller commercial banks highly exposed to the housing market.

Efforts to maintain financial stability have been heightened since the second half of last year.

More clarification on policies is expected in the third Plenum, providing the market with a better understanding.

Low inflation environment could continue throughout 2025 or even beyond.

Deflation in China is not seen as extremely harmful, as the low inflation environment has a clear cause.

Housing bubble burst in late 2021, leading to reduced domestic investment, consumption, and overall demand.

Best case scenario predicts housing market stabilization by the end of 2025, but domestic demand may still remain weak.

Central bank is unwilling to cut rates to boost demand due to long-term agenda focusing on strengthening the supply chain.

Shift in focus from consumer market and services to the industrial sector during the transition period.

Inflation is expected to remain very low during the transition due to limited room for monetary easing by the central bank.

Transcripts

we keep the view that China is in this

permanently permanently low inflation

for the Long Haul actually because the

monetary response from the central bank

has been very mild the financial

consolidation in terms of the commercial

Banks has been deepening so for the

banks they're reluctant to issue more

credit and at the same time food prices

are going down uh for domestic demand it

will be a long time before we see a

meaningful rebound because the housing

uh the housing downturn is still

continuing so as a result I think the

current low inflation would continue and

the domestic orders and foreign orders

both decline but the foreign orders

actually hold up relatively well given

that the major Western central banks

entering this uh cutting rates of the

cycle that could boost the China's

export in the long

run how much deflation do you think the

policy makers are willing to tolerate at

this stage because there has been some

argument that I've seen out there riew

at least that maybe they are tolerating

some deflation as they see this as sort

of necessary pains for their long-term

structural

goals and their tolerance is very high I

have to say because there are several

constraints one is that uh they have to

defend the valuation of yan so given

that they cannot really cut the rates

substantially and the domestical

financial system that uh desperately

needs some reform so the smaller

commercial banks are highly exposed to

housing market and we have seen a faster

consolidation since the last half of

last year the second half of last year

and as a result we have seen this uh

heightened effort to maintain Financial

stability we expect actually more

clarification uh in the third Plum which

is coming in the week and and by then I

think the market would have better

understanding but we think uh this lwi

inflation environment could easily carry

over to throughout 2025 or even

Beyond and how bad is this deflation in

China because deflation typically seen

as a demand killer uh

but how bad can it really get at a time

when the consumer either way is weak

because of many other

factors uh uh there is no mysterious

reason why we're in the current uh low

inflation environment because given that

housing um Bubble has bursted uh towards

uh late 2021 then it has brought down

the domestic investment and then

consumption and then overall demand uh

we now in our best case scenario think

that by the end of 2025 the housing

market housing market can stabilize and

even then probably uh the domestic

demand will still remain weak the

central bank is unwilling to really cut

rates to boost overall demand because

they have this long long-term agenda to

focus on strengthening the supply chain

and there is a shift from being focusing

on consumer market and services to this

industrial sector and during this

transition uh the inflation is expected

to be very low because there's very

limited room for the central bank really

to do monetary easing