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There is a debate about whether China's economy faces "deflation."
Since the first quarter of this year, there has been a lot of debate in the society about whether China has entered deflation. These debates arise because some of the characteristics of the Chinese economy are partly consistent with deflationary connotations.
What is deflation, deflation is the abbreviation of deflation, is an economic concept corresponding to inflation. Simply put, inflation is the continuous rise in prices of the entire society, everything is expensive, the currency is devalued and worthless, in layman's terms, it is the soaring price and currency depreciation. Deflation, on the other hand, is when prices continue to fall, consumers can buy more for the same money, but corporate profits fall, investment willingness declines, economic activity weakens, and the economy falls into a downturn.
How can you tell if it's deflationary? One of the most important indicators is the Consumer Price Index (CPI), when the CPI falls for three consecutive months, it means that there is deflation; If it exceeds six months, it is deep deflation.
Let's take a look at the CPI situation in the mainland this year, CPI has maintained a downward trend since this year, from February to June CPI has been falling month-on-month, only slightly increased in July and August, but the overall price level is still low. From a year-on-year perspective, from September 2022, the CPI was basically in a downward trend, and only in July did it reverse the downward trend. According to the criteria of deflation, the price depression of nearly one year has made people wonder whether China's economy has entered deflation.
Figure 1 Changes in CPI since August 2022
At the same time, two other indicators are also worth paying attention to, one is the industrial producer price (PPI) and the other is the manufacturing purchasing managers' index (PMI).
From the perspective of PPI, since October 2022, PPI has been declining year-on-year, the most serious is a year-on-year decline of 5.4% in June 2023, and a decrease of 3% in August, which has been a continuous decline for nearly one year. The continuous decline in PPI will compress corporate profits and reduce their confidence and willingness to invest.
Figure 2 Changes in PPI since August 2022
From the perspective of the manufacturing PMI index, in the fourth quarter of 2022, the PMI was in the recession range; In the first quarter of 2023, it returned to the boom zone, and from April, the PMI fell back to the sluggish zone.
Figure 3 National manufacturing PMI index since July 2022
Based on the changes of the three indexes of CPI, PPI and PMI since the second half of 2022, the consumer price index and the factory price index of industrial products have shown a downward trend, and most of the PMI is also in the recession range, and China's economy does have signs of deflation, and measures need to be taken to avoid entering real deflation.
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State ministries and commissions have repeatedly stated that there is no deflation in China's economy
Inflation is terrible for a country or region, but deflation is even more terrible. Because inflation means that there is more money in the society, in order to prevent the depreciation of money, the people will tend to spend the money, and enterprises will increase investment because of more money, and the economy will overheat in society, but it is easy to govern, as long as the money supply is reduced, prices will fall.
However, deflation is different, excessive deflation, will lead to a long-term, large-scale decline in the overall price level, tightening of the market monetary root, slowing down the speed of money circulation, sluggish market sales, affecting the enthusiasm of enterprise production and investment, resulting in enterprises "reluctant to invest" and residents "reluctant to buy", the result is a large amount of idle funds, insufficient social demand, and eventually lead to weak economic growth, into a downturn, serious economic crisis, and it is more difficult to control deflation, taking longer.
At present, due to the comprehensive impact of factors such as the game between China and the United States, the new crown epidemic, and the downturn in the real estate market, the mainland's economic development has slowed down, and the risks and pressures it faces have increased. At the same time, the United States has stepped up its international suppression of China, and sang down China's economy and Chinese stock market. In this context, the Chinese government must respond and clarify the debate in society about whether China's economy is "deflationary" and give confidence to the society. Therefore, since the first quarter, the National Bureau of Statistics and the National Development and Reform Commission have successively responded to the response: there is no deflation in China's economy at present, and there will be no deflation in the next stage.
On April 18, at a press conference on the operation of the national economy in the first quarter held by the State Council's new office, Fu Linghui, spokesperson of the National Bureau of Statistics and director of the Department of Comprehensive Statistics of the National Economy, responded for the first time to the discussion in the society about whether China's economy has entered "deflation". He said that in general, there is no deflation in the current Chinese economy, and there will be no deflation in the next stage.
There are three reasons: first, prices remained moderately rising, consumer prices rose by 1.3% year-on-year in the first quarter, and second, money supply maintained rapid growth, and broad money M2 increased by 12.7% at the end of March. Third, the economy grew steadily, and China's economy grew by 4.5% in the first quarter, up from the fourth quarter of the previous year.
Subsequently, at the press conference on the operation of the national economy in the first half of 2023 on July 17, and the press conference held by the State Council's new office on the operation of the national economy in July on August 15, Fu Linghui, spokesman of the National Bureau of Statistics, once again stressed that there is no deflation in the current Chinese economy, and there will be no deflation in the next stage. In the next stage, as the economy recovers, market demand continues to expand, the relationship between supply and demand is expected to gradually improve, and the year-on-year increase in CPI will gradually return to a reasonable level.
On September 20, at the State Council's regular policy briefing, Cong Liang, deputy director of the National Development and Reform Commission, also responded to whether "deflation" was "deflation", judging by factors such as price level, demand recovery, economic growth, and money supply, that there is no so-called deflation in China's economy, and there will be no deflation in the later period.
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The biggest problem facing China today: insufficient demand
At present, international and domestic demand shows signs of weakening, and the "troika" of investment, consumption and export has weakened, resulting in insufficient economic development momentum and a decline in development speed.
Investment continues to decline. From the perspective of the growth rate of fixed investment in the past one year, the growth rate has fallen from nearly 6% to 3.2% in August, and there is a trend of continued decline, and it is very likely that investment will decline to negative growth in some month.
Figure 4 Changes in investment growth since August 2022
The consumer market is sluggish. Before 2018, the growth rate of retail sales of consumer goods was double-digit, and it fell to 9% in 2018; Subsequently, under the influence of the epidemic, both 2020 and 2022 were negative growth, and although the growth rate increased in the first quarter of 2023, the growth rate dropped to single digits after entering June, and the growth rate in July was only 2.5%.
The consumer market is not performing well, mainly due to the downturn in the real estate market, real estate has entered an inflection point in recent years, the housing market is oversupplied, the total population is declining, the newlyweds have fallen sharply, the people's wallets are suffocated, and the houses cannot be sold. The long chain of the real estate industry directly affects the consumption of home appliances, kitchenware, bedding and so on.
Figure 5 Total retail sales of consumer goods and growth rate since July 2022
Export growth showed negative growth. In 2021 and 2022, due to the impact of the epidemic, the production of other countries in the world was affected, but the continent highlighted its advantages as a world factory and shouldered the burden of supplying countries around the world, so exports achieved rapid growth, of which the growth rate in 2021 exceeded 20%. Since 2023, the West's internal contraction policies such as decoupling and industrial chain restructuring have slowly taken effect, and China's exports have begun to decline, with negative growth in June and July, and a growth rate of only 0.8% in August.
Figure 6 Export growth since August 2022
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Countermeasures to avoid falling into the deflationary trap
To control deflation, it is necessary to adjust and optimize the industrial structure, comprehensively use investment, consumption, exports and other measures to stimulate economic growth, implement a proactive fiscal policy, a prudent monetary policy, a correct consumption policy, and adhere to the policy of expanding domestic demand.
-- Suggestions for countermeasures to stimulate consumption
1. Establish a unified pension system for urban and rural areas nationwide. At present, only people in the city have pensions, more tens of thousands, less three or four thousand; However, the elderly in rural areas do not have a pension, and now they only have a monthly subsidy of less than 200 yuan, which is completely insufficient to live. Establish a unified pension system, the minimum for the elderly over 60 years old is not less than 2,000 yuan per month, so that the rural elderly can be stimulated to consume.
2. Set up a central incentive birth fund to cover all children under 6 years old, 1,000 yuan per month for one child, 2,000 yuan per month for the second child, and 4,000 yuan per month for three children and above, until the age of 6.
3. Increase the personal income tax payment base from the current 5,000 yuan to 8,000 yuan.
4. Inheritance tax, capital exit tax, and tax on the ownership of more than three houses.
5. Improve the public affordable housing system, and slowly increase the proportion of affordable housing to more than 30%.
-- Suggestions for measures to expand investment
1. Expand the scale of special debt and solve the problem of lack of money for local government investment. 2. Solve the local debt crisis. 3. Encourage private enterprises to invest. 4. Focus on investing in new infrastructure for the digital economy.
-- Suggestions for countermeasures to expand exports
1. Vigorously develop cross-border e-commerce. 2. Expand exports from countries along the "Belt and Road". 3. Strengthen cooperation with ASEAN and expand exports to ASEAN. 4. Enterprises go out and expand indirect exports.
Explanation of terms:
1. The consumer price index (CPI) is a relative number reflecting the trend and degree of price changes of consumer goods and services purchased by urban and rural residents in a certain period, and is the result of comprehensive summary calculation of urban consumer price index and rural consumer price index. Through this index, we can observe and analyze the impact of retail prices of consumer goods and price changes of service items on the actual living expenses of urban and rural residents.
2. Producer price index (PPI), is an index used to measure the average change in manufacturers' factory prices, it is one of several price indexes collected and sorted out by statistical departments, and the market sensitivity is very high. If the producer price index is higher than expected, it indicates that there is a risk of inflation. If the producer price index is lower than expected, it indicates that there is a risk of deflation.
3. The purchase price index of industrial producers refers to the index of the purchase price of raw materials, fuel and power used as intermediate inputs when industrial enterprises organize production (including value-added tax, freight, customs duties, etc.). The industrial producer purchase price index reflects the trend and magnitude of the purchase price of industrial enterprises as intermediate inputs.
4. The purchasing managers' index (PMI), which is a barometer of macroeconomic changes, plays an important role in monitoring, forecasting and early warning of national economic activities. The PMI index system includes manufacturing and non-manufacturing fields, reflecting the overall change trend of manufacturing and non-manufacturing economy, and the operation of multiple aspects of enterprise business activities. The PMI value ranges from 0 to 100%, with 50% being the critical point of expansion and contraction; Above 50%, indicating an expansion in economic activity from the previous month; Below 50%, indicating a contraction in economic activity from the previous month. In practice, macroeconomic changes can be monitored through PMI trends.
[Note: Some of the pictures in the article are taken from online public channel materials, and the copyright belongs to the original author. ] This article is only the editor's opinion, with limitations, and does not make any decision-making basis. Interested readers can pay attention and participate in sharing and discussion.