Why Might China Avoid Strong Inflation?
With unemployment in China rising, and with the rate for 16-24-year-olds up four percentage points year-on-year in June, economic stimulus is urgently needed. At the same time, Premier Li Keqiang has been wise to highlight the importance of not overdoing it.
SHANGHAI – When high levels of capital investment spending fueled a sustained increase in Chinese inflation from 1991 to 2011, the authorities quickly brought the situation under control, and over the last decade, CPI has rarely exceeded 2%, compared to 5.4% in 2011. With policymakers in most major economies now losing their grip on price stability, can China continue to keep a lid on inflation this year and next?
To answer this question, it is worth considering how China succeeded in curbing inflation for the past decade. Notably, the government refrained from new rounds of large fiscal and monetary stimulus, and thanks to the central bank’s increased autonomy, money creation and credit growth stopped passively catering to investment projects from below.
After 2015, China’s central bank adopted a prudent tone and adjusted credit allocation to support sectors with excessive debt ratios. Highly polluting industries and the real-estate sector – both of which had driven rapid GDP growth in the past – faced financial repression. At the same time, the central government has tolerated the minimum growth rates that could accommodate steady employment growth.