China’s ongoing price decline has significantly heightened concerns about a deflation mindset taking hold across the economy. Policymakers have ramped up their efforts to stimulate effective demand, though zero interest rates and quantitative easing remain off the table for now.
Recent high-level discussions focused on addressing disorderly competition signal that more supply-side interventions are likely coming. Market observers expect these measures to take a more market-driven approach this time around, with producer price inflation potentially returning to positive territory within six to twelve months.
Supply Overabundance Creates Policy Challenges
Chinese authorities are growing increasingly concerned about the risks posed by extended deflationary pressures. The Producer Price Index has been falling since October 2022, while Consumer Price Index inflation has remained near zero in recent months. This environment encourages consumers to delay purchases and businesses to cut back on investments, creating a downward spiral that weakens domestic demand.
For nine straight quarters, nominal GDP growth has lagged behind real economic expansion, contributing to the widening gap between US and Chinese GDP figures despite China’s stronger real growth rates. Breaking this cycle of declining prices and reduced demand has become a top priority for policymakers seeking to restore economic momentum.
Measured Stimulus Approach Takes Shape
To stimulate domestic consumption, Chinese officials have implemented expansionary fiscal policies and adopted a “moderately loose” monetary stance for this year. However, there appears to be little interest in deploying massive stimulus packages, with efficiency, social equity, and sustainability factors influencing policy decisions. China shows no signs of moving toward zero interest rates, quantitative easing programs, or yuan devaluation as tools to combat deflation.
Top leadership has recently called for addressing “involution” and disorderly competition, likely setting the stage for additional supply-side measures aimed at preventing duplicate investments, reducing overcapacity, and stopping domestic price dumping. This round of capacity reductions targets industries where private companies dominate, such as new energy vehicles, which means market consolidation may require more time to unfold effectively.
So, the Chinese cut the RRR, adding $113 billion of liquidity support to the equity market, potentially setting up a 'stock stabilization fund' and will lower borrowing costs on as much as $5.3 trillion in mortgages and easing rules for second-home purchases.
The bottom is in… pic.twitter.com/auKmc6HCt6
— Jamie Coutts CMT (@Jamie1Coutts) September 24, 2024
Broader Economic Implications
China’s deflationary pressures and measured policy response could weigh on global risk sentiment, potentially creating headwinds for cryptocurrency markets. The focus on supply-side reforms rather than aggressive monetary stimulus may limit near-term positive spillover effects for digital assets.
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