Chinese Economists Fear Deflationary Spiral, Will The PBOC Cut Before the Holiday, or Wait Until the NPC in March?

Liu Shan is looking for another PBOC cut to fight deflationary forces in the Chinese economy:

Prices continued to decline is mainly due to lack of effective demand of the real economy, where consumption of less than obvious signs after Bureau of Statistics data show that in 2014 real consumption growth slower than the previous year.

Consumer slowdown and the economic downturn, it looks more like a "chicken and egg" relationship. Because the private and public consumption decreased, resulting in decreased growth-related investments, thereby increasing the downward pressure on the economy. The lack of economic growth momentum, resulting in personal income and revenue slowdown, thereby inhibiting the private consumption and public spending.

Problems include the broken transmission of the credit system: lack of credit demand, more caution at banks, banks putting capital into their securities division to invest in the market, also debtors don't want new credit, demand is mainly for debtors who need to rollover existing debts.

Liu Shan goes on to the other factors, which include contracting money supply, exacerbated by capital outflows. If the U.S. rate hike expectations firm, capital outflows will intensify. He says, ultimately the bank will have to launch three policies: interest rate cuts, RRR cuts and intervention in the foreign exchange market to defend the yuan.

Finally, he says that the latest meeting of the Leading Group for Financial and Economic Affairs didn't announce anything regarding any of these policies, which means they've already discussed the policies. The meeting was for getting everyone on the same page ahead of a new policy announcement. Liu thought the PBOC would cut interest rates before the weekend, which leaves today.

Source: 第58期:央行何时二次降息?

China is running into the same problems as the Western economies at the end of their credit cycles. There is a limit to the amount of debt an economy can handle and China's under developed financial markets are not capable of supporting higher levels of debt at this time. Securitized debt markets, REITs, mortgage backed securities and more efficient credit allocation will take time to develop. Rate cuts are likely later in the year because the easing cycle has begun.

Western press repeats a similar message to Liu's:

People’s Bank of China stares at another rate cut
Haitong Securities economist Lu Xunlei said the government needed to carefully manage its fiscal policy in the year ahead to reduce the prospect of deflation setting in.

“Deflation is becoming a global issue now. In China we are at risk of deflation but also there is a risk that a high rate of leverage could create a serious bubble,” Mr Lu told Tencent Finance.

“A positive fiscal policy should be enhanced further.”

A growing number of economists believe the central bank will have to cut interest rates again in the next few months to help revive China’s flagging economic growth.

The 2015 official growth target will be revealed in early March at the National People’s Congress and most forecasters believe it will be set at 7 per cent. The Chinese government is also expected to lower its inflation target from 3.5 per cent to 3 per cent at the same time.

This article from iFeng lists opinions from many economists at financial institutions, with most discussing the need for rate cuts to fight deflationary forces. One of the most bearish is Zhu Jianfang, chief economist of CITIC Securities. He said:
Although the CPI still rose and did not technically meet the definition of deflation, all signs point to an economy that is falling into a full deflationary spiral, said Zhu Jianfang, chief economist with CITIC Securities.

A team led by Zhu forecast that the gross domestic product (GDP) deflator in the first quarter of this year could experience a fall, an indicator that the economy has in fact entered a deflationary phase.
In the Chinese article linked below, he also is quoted as saying:
Since October 2014, the Development and Reform Commission has approved a large number of intensive infrastructure projects. In the first half of this year, he expects the increase in infrastructure investment will be more significant.

iFeng: 经济滑向全面通缩 财政货币政策或集体上阵


  1. No sense waiting on the cut, get er done before the holiday so folks can have more cash on hand for presents, spending, etc.

  2. No sense waiting on the cut, get er done before the holiday so folks can have more cash on hand for presents, spending, etc.