38 BEIJING REVIEW APRIL 20, 2017 http://www.bjreview.com
BUSINESS MARKET WATCH
Chinaís Economy Will Not Suffer Stagflation
OPINION
This is an edited excerpt of an article by Tang Jianwei,
a senior macroeconomic analyst with the Financial
Research Center of Bank of Communications, published
in the Economic Daily
Copyedited by Sudeshna SarkarT
hough total demand has not yet recov-
ered substantially and the monetary
policy maintains neutral, we should
not conclude that the Chinese economy is in
stagflation. It is very unlikely that the Chinese
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Since the consumer price index (CPI)
rose above 2 percent, there were views that
the Chinese economy will enter stagfla-
tion. In January, the CPI and producer price
index (PPI) both rose much faster than in
December 2016, fuelling stagflation views.
However, in February, CPI declined 0.2 per-
cent over the previous month but rose by 0.8
percent over a year ago, which was much
lower than market expectations. PPI rose by
0.6 percent over the previous month and 7.8
percent over a year ago. Total demand has
QRW\HWUHFRYHUHGVLJQLĶFDQWO\DQGWKHPRQ
etary policy remains neutral.
In economics, an economy is mired in
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criteria: The economy stops growing or suf-
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percent or higher than GDP growth; and the
unemployment rate is high. Going by these
yardsticks, the slower economic growth and
slight price hike in China do not mean typical
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First, the trend of economic growth. This
year, without the occurrence of trade wars
between China and the United States or oth-
er ìblack swanî events, it is widely expected
that Chinaís exports will improve slightly;
fixed assets investment will remain steady,
driven by robust infrastructure investment;
and consumption will also remain stable.
While GDP growth slows down, Chinaís eco-
nomic structure has improved, indicating
the quality of economic growth has been
upgraded. In the future, China will gain more
growth momentum as the supply-side struc-
tural reform continues.
Second, the price trend. The year-on-
year growth of CPI is likely to continue till the
middle of this year, but in the second half of
the year, it is expected to drop. So the pres-
sure of inflation will not be significant the
whole year.
Last, the employment. In China, the reg-
istered unemployment rate in urban areas
has stayed around 4 percent for many years.
In the last three or four years, over 13 million
jobs were created in cities every year. The
shortage of migrant workers and rising labor
costs also indicate that the major problem in
the future is not unemployment but whether
there is enough labor.
However, if China fails to address risks
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the yuanís depreciation, the difficulties for
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and the risk of stagflation still exists. How
should the country address the risk?
First, China should adopt a neutral mon-
etary policy and control the money supply
and bank loans to curtail asset price bubbles
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Second, it should significantly al-
leviate the tax burden on individuals and
corporations. The government has been
endeavoring to reduce taxes and adminis-
trative fees but the tax burden is still quite
high. So it must take larger strides in cutting
taxes and fees. In the short term, tax reduc-
tion will reduce government revenue, but in
the medium and long term, this will improve
business vitality and expand tax bases, fuel-LQJVXVWDLQDEOHJURZWKRIĶVFDOUHYHQXH
Third, China should unswervingly cut
excessive production capacity. Without
eradicating excessive capacity and shutting
down poor-performing ìzombieî enterprises,
the economic stimulus policy will not work
in the short term and resource allocation will
continue to be distorted in the long term.
Lastly, the government should relax
control to unleash more energy from the
market. By opening up monopolized indus-
tries and loosening controls over production
factors, the government can give more
freedom to the market. China should also
continue to encourage innovation and
business startups and foster new growth
momentum, so as to shake off the pressure
of a sustained economic slowdown. QXINHUA
A staff member sorts out fruit at a supermarket in Hengshui, north Chinaís Hebei Province, on March 8