22 March 2019
The People's Bank of China must ensure more liquidity enters the real economy to combat deflationary pressure. Photo: Bloomberg
The People's Bank of China must ensure more liquidity enters the real economy to combat deflationary pressure. Photo: Bloomberg

China steps up fight against deflation

China’s domestic consumption continues to face downward pressure despite government efforts to boost its role as an engine of economic growth, an HSBC economist said.

Aggregate social financing, a gauge of credit that includes bank loans and shadow banking financing, was 16.46 trillion yuan (US$2.65 trillion) in 2014, 859.8 billion yuan less than in the previous year, according to the People’s Bank of China.

New yuan loans for December dropped to 697.3 billion yuan from 852.7 billion yuan a month earlier, missing economists’ median estimate of 880 billion yuan. For the entire year, new yuan lending reached 9.78 trillion yuan, up 890 billion yuan from the previous year.

“On one hand, it reflects that domestic demand has downward pressure. More importantly, there is not enough effectiveness in the execution of easing policies,” said Qu Hongbin, co-head of Asian Economic Research and chief economist in Greater China at HSBC.

There is still a lot of work for the central bank to do to ensure more liquidity enters the real economy in order to combat deflationary pressure, Qu said.

He said the government will continue to boost domestic consumption, but it is also likely to resort to infrastructure investment to shore up the economy because of the difficulty in driving domestic consumption.

The central bank cut the benchmark deposit rate by 25 basis points to 2.75 percent and slashed the lending rate by 40 basis points to 5.6 percent in November in a bid to improve liquidity in the market.

Qu said the central bank should have made the move much earlier when it first sensed deflationary pressure.

He expects the central bank to lower the interest rate two more times this year, each at 25 basis points. It is also likely to cut the banks’ reserve requirement ratio three times, at 50 basis points each time.

Meanwhile, Richard Jerram, chief economist at the Bank of Singapore, warned of a potential credit risk in China, noting that cutting interest rates will only make the asset bubble bigger.

The debt-to-GDP ratio levels are at record highs, and the government should strive to better allocate credit, he said.

“It’s better to liberalize the distribution of credit,” Jerram said. “The local governments and state-owned enterprises are not using the credit efficiently.”

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EJ Insight reporter

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