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Chinese economy to experience stagflation

A Chinese central official suggested that stagflation might affect a struggling economy from the beginning of 2022. It’s the newest sign that the Chinese government might consider taking proactive steps to address slow growth.

On Sunday, a member of the People’s Bank of China’s monetary policy committee, Liu Shijin, told an online forum that the Chinese economy might need to deal with stagflation this year and 2022 as well. It will be inevitable if demand remains to struggle.

Liu said that the government needs to pay attention to this process. This is because it will affect the fourth quarter and next year.

Stagflation happens when inflation is high but economic growth slows. It can be problematic since policies intended to control inflation risk suppressing growth even more. Meanwhile, policies aimed to boost growth risk cause prices to keep growing.

Even with his warning, Liu still suspects that the economy might hit China’s growth target of more than 7%.

Risks to the Chinese economy started to grow in the last several months. Besides rising producer price inflation in the world’s factories, the country is also fighting a severe energy crisis and a significant slowdown in the real estate sector.

Overview

Chinese Premier recently confirmed those concerns, saying that the economy was facing new descending pressures. He mentioned recent outbreaks,  rising commodity prices, severe flooding, and energy shortages as critical concerns.

Li also said that policymakers should focus on helping small businesses and manufacturing companies by offering tax or administrative fee reductions.

In a Sunday report, the head of China economics at Macquarie Group, Larry Hu, said that the concern for growth slowdown is growing among technocrats at various government agencies.

Analysts also think that China’s policymakers might consider taking other steps to ease monetary policy or cutting interest rates. On Friday,  the central bank’s quarterly report ignored phrases that have arisen previously to signal tighter policies.

According to analysts (from Goldman Sachs, Citi, and Nomura), removing those phrases implies a shift on the horizon.

In a Sunday report, Nomura analysts wrote that in their opinion, these removals represent an official change to the PBoC’s policy position.

On Monday, the central bank held the Loan Prime Rate unchanged for the 18th month in a row.

However, analysts from Capital Economics believe that the central bank will soon start to cut policy rates. In a Monday report, senior China economist for the firm, Julian Evans-Pritchard, wrote that as economic strains continue to increase, there will be more demand to remove the financing efforts of indebted borrowers.

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