Politics
2 steps the Chinese economy must take to avoid deflation: Stephen Roach
- China risks falling into a prolonged period of deflation, believes Stephen Roach, an economist at Yale.
- The country's monetary stimulus drive is a step in the right direction, Roach said in an FT opinion piece.
- Beijing must now continue its fiscal stimulus and structural reforms, he said.
Although Chinese markets have received a major boost from Beijing's recent stimulus efforts, the country has only taken one of three necessary steps, says Stephen Roach, an economist at Yale.
The two missing pieces are fiscal support and structural reform, writes Roach in a new opinion article for the Financial Times. If China does not address this, its economic difficulties will persist.
“China risks falling into a Japan-like quagmire of stagnation and deflation following the bursting of a major debt-fueled asset bubble,” he writes.
In the case of Japan, the fall in asset prices in the 1980s stalled growth momentum and plunged the country into a difficult situation. three-decade deflationary spiral.
According to Roach, China's projected GDP rate of 4% over the next five years virtually mirrors Tokyo's situation 30 years ago.
But Beijing could escape that fate if it adopted lessons learned by Japan, he said: “Powerful fiscal and monetary stimulus were needed to give Japan exit velocity while structural reforms were vital for a sustainable recovery. »
Of the “three arrows” strategy, Beijing has just delivered the first part. Last week's stimulus package, including cash injections, easing of mortgage rates and significant reductions in interest rates and the reserve requirement ratio, was an impressive monetary boost, Roach said.
China must now do the same with fiscal stimulus.
Although the country's leaders indicated a willingness to financially support their consumers at the Communist Party Politburo meeting last week, Roach noted that few details were given.
Yet shaken consumer confidence in the country is at the heart of most of China's economic problems, analysts say.
Beijing must invest in human resources to revive domestic demand; Without it, the country is already in the midst of deflation, while its huge real estate market is swamped with unsold homes and large debts.
Yet Roach explained Beijing's hesitance to spend more as a reflection of its bad experiences with debt. The country's debt-to-GDP ratio is nearly three times higher than it was over the past decade, which likely discourages Beijing:
“Like Japan in the 1990s, Beijing remains cautious about deploying a fiscal bazooka as it did in 2009-2010, given the growing public sector debt,” he said.
But even as China increases spending in key sectors, it will also need to implement long-term measures. structural adjustments.
This is the most difficult point of change, Roach said, because the nation is surrounded by problems: demographics, productivity and underconsumption.
For example, Beijing has yet to launch comprehensive social security reforms, such as improving pension and health policies. If these products were offered, Chinese consumers would be less inclined to save.
This year, Nobel economist Paul Krugman also compared China's economy to that of Japan, warning that Beijing would fail to escape a worst-case scenario. Part of the problem is that China's leadership stands in the way of an efficient economy, he said.
To emphasize this point, Krugman cited China's tech crackdown; Even though Beijing has eased its control over the sector, it still has more to do to restore business confidence.
“Actions in favor of the private sector are more rhetorical than substantial and aim to roll back the regulatory and political constraints in place since mid-2001,” acknowledged Mr. Roach.
