Gordon G. Chang, Contributor
On Friday, an economist with the State Council’s Development Research Center issued a warning that consumer prices could fall in the second half of this year. “China has corrected its excessive monetary policy tightening in the last quarter of 2011, but the speed and effort of turning-around are not sufficient,” wrote Wu Qing in a government newspaper, China Economic Times. “A typical deflation will emerge,” Wu predicted, if the central government does not take decisive action. The last month that China saw a year-on-year decline in consumer prices was October 2009.
This week, Beijing’s National Bureau of Statistics will issue the Consumer Price Index for January, and analysts expect another fall in the rate of inflation. In December, consumer prices, as measured by the index, rose 4.1% over the same month in 2010. That number was down from November’s 4.2% year-on-year figure. Inflation peaked in July at 6.5%.
The official inflation numbers undoubtedly mask the full extent of price increases, but they correctly show the trend. And should China actually fall into deflation later this year, as Wu suggests, that would be just another indication of a general falloff in economic activity.
And so would a decline in the value of the Chinese currency. Wu Qing also predicted that, unless the People’s Bank of China intervenes, the renminbi will depreciate this year. This seemingly startling forecast reflects behind-the-scenes mutterings in the Chinese capital about unwelcome declines in export surpluses due in large part to falling orders from Europe.
Whether because of market forces, as Wu suggests, or by official action, the Chinese currency is on a downward path. And a cheapening currency is another sign of a weakening economy.
Why do analysts question Beijing’s announcement of 8.9% GDP growth in Q4 2011? Because China’s other numbers suggest the economy is in fact faltering. It is, for instance, virtually impossible to reconcile the most recent government growth projection for this year—8.5%, from PBOC adviser Li Daokui—with Wu’s warnings of currency depreciation and second-half deflation. When we look at Beijing’s statistics for vehicles sales, property prices, or electricity consumption, we get the picture of an economy in trouble, growing at perhaps the same anemic rate as America’s.
What should Beijing do? Wu’s colleague at the prestigious Development Research Center, Zhang Chenghui, also suggested that the government loosen credit, writing that there is already “a shortage of money.” Yet Premier Wen Jiabao, China’s top economic official, still believes that the government must act to rein in the economy. Until he abandons his “fine tuning” policies by opening the money taps wide, China will continue to skid. So far, the most Mr. Wen has done is mandate one decrease in the bank reserve ratio requirement.
Despite mildly pessimistic forecasts for the current quarter, many analysts don’t worry about the downturn, arguing that it was what policymakers wanted all along. They’re probably wrong, because growth-obsessed central officials acted two years ago to stop property prices from rising further, not trigger declines. In any event, even those who trust the skills of the Beijing’s fabled economic planners must admit that the onset of deflation and a depreciation of the renminbi would indicate that events were passing beyond their control.
We are, as Wu Qing’s comments tell us, almost at that stage.