Deflation seen as greatest challenge
Print Edition
CHINA’S policy-makers need to ease monetary policies, step up fiscal spending and continue financial reforms to avoid a protracted economic downturn as the country is facing deflationary pressure this year, HSBC said.
“The greatest challenge for policy-makers this year is deflationary pressure,” said Qu Hongbin, chief economist of HSBC China.
Industries in China are suffering overcapacity issues and the inflation rates for both consumer and factory goods are falling faster, indicating deflationary pressure, Qu said.
Weak consumption demand from consumers and factories could further drive prices lower, Qu added.
Economists believe that deflation could also harm the economy as consumers don’t spend as they hope for prices to fall further while companies hold back on investment due to the drop in consumer demand.
HSBC predicted two interest rate cuts by the central bank of 0.25 percentage points each time this year.
The bank also said that allowing local governments to issue bonds directly and supporting Internet lending could help relieve deflationary pressure.
Qu said: “By navigating the economic policies the government will be able to contain the pressure and keep economic growth at about 7.3 percent.”
China’s Consumer Price Index grew 2 percent in 2014 from a year earlier, below the government’s 3.5 percent target for the year, the National Bureau of Statistics said last week. The growth was below the 2.6 percent rise in 2013.
The Producer Price Index declined 1.9 percent year on year in 2014.
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