January 12, 2006

You are on the invidual archive page of Deflating. Click Simon World weblog for the main page.

The SCMP reports:

Economic growth is likely to slow to between 8.5 and 9 per cent on the mainland this year, with deflation emerging as a risk in the second half, the state planning agency said yesterday. "The growth rate will decrease, led by easing investment and exports," the National Development and Reform Commission said in a report published in the official China Securities Journal.
9% growth is a nice problem to have. The true problem is what has driven this growth - exports and fixed asset investment. Consumption has not kept pace and private savings are rising as money is set aside to cover the growing costs of education and health and to supplement a non-existant social security structure, especially for retirees as life expectancy rapidly grows.

The biggest problem is deflation. Too much investment has created too much capacity and already the hissing sounds can be heard, for example in Shanghai's property market. China's financial system is still awash with bad debts, creaky banks with poor controls and policies as often driven by cronyism and politics as by finance. China's pegging of the yuan means effectively it has outsourced its monetary policy to the Fed, ECB, BoJ and other central banks. The government is trying to prop up consumption but is taking in more than it can spend. So when prices start to fall, what is the most likely way out?

Export deflation.

If you own a factory, once it starts running you need to sell whatever it produces. You want to make a profit, but the money you spent building the factory is a sunk cost. Even if you can't make that money back, you'll keep on producing goods if you can sell them for more than it costs to make each individual unit (the marignal cost of production, in econo-speak). It doesn't cost much to make stuff in China. As a factory owner, you don't care if you're not making a net profit - if you can keep making a small amount on each piece produced, you will. Other countries will complain you are dumping goods at below cost, but it depends what you deem the cost of production.

It's a unique kind of deflationary problem, combining some elements of the deflations of Japan in the past 15 years, the Great Depression and others. But it is deflation with Chinese characteristics, especially as China is still not a fully functioning capitalist economy.

The good news? This could keep economists busy for years.

posted by Simon on 01.12.06 at 11:31 AM in the China economy category.


TrackBack URL for this entry:

Send a manual trackback ping to this post.

poker casino2
Excerpt: poker casino poker 579
Weblog: poker casino2
Tracked: February 13, 2006 10:03 AM


Economists in the US predicted that there would be inflation in the US this year due to high energy prices and weakened US currency. So we have Inflation in US and deflation in China, I wonder how it will play out for both countries in 2006? Will deflation in China make Chinese goods even cheaper than before, hence softening the inflation problems in the US?

posted by: David on 01.12.06 at 11:57 AM [permalink]

The key problem comes when firms making losses, even on every widget produced, aren't allowed to close or rationalise. Of course China's not alone in having a slightly faulty shut down mechanism - just look at the US airlines.

posted by: Duncan on 01.13.06 at 01:00 AM [permalink]

Post a Comment:


Email Address:



Remember your info?