Chinese government bond yields continue to tumble as deflation becomes entrenched. As usual, there have been calls for China to adopt an aggressive fiscal stimulus to reflate the economy, directly targeting households through social welfare spending. The pressure on commodities prices, including iron ore, steel and oil, suggests that those still awaiting a large fiscal stimulus will continue to be disappointed.
The slide into deflation is a natural byproduct of China’s economic strategy, and supportive of it too. Reflating the economy is not a priority for the authorities. The central bank has continuously bypassed the opportunity to cut interest rates faster, to support the housing market and prop up confidence.
The authorities’ focus will remain squarely on its ‘new quality productive forces’ (NQPF) strategy to drive growth and boost China’s global competitiveness in manufacturing. This is exacerbating the deflationary impulses buffeting the economy.
The phrase ‘debt deflation’ is frequently misused. To suggest falling or negative inflation is confirmation that debt deflation has taken hold oversimplifies Irving Fisher’s theory. This will be explored in more detail in a separate commentary. However, with employment expectations now also deteriorating, the risk that China tips into outright debt deflation is growing.
