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.