Q: Is China entering a period of deflation and what could be the consequences?

Q： 中国是否正在进入通货紧缩时期，会产生什么后果？

A: China is not in deflation yet – its core inflation is still positive, and headline inflation also turned positive again after one month of negative reading.

A： 中国还没有陷入通货紧缩——其核心通胀仍然是正的，总体通胀在一个月的负读数后也再次转正。

To achieve moderate growth pace, or even potentially higher growth, China needs to provide sufficient countercyclical policy support to boost near-term domestic demand so as to avoid deflation and put an end to the property downturn.

要实现适度增长，甚至可能实现更高的增长，中国需要提供足够的逆周期政策支持，以提振近期国内需求，从而避免通货紧缩，结束房地产低迷。

Q: There are rising discussions of whether China is about to follow Japan's path of “the lost decades” because of the common challenges facing the two economies, such as an aging population, property market downturn and potential deflation risks.

Q： 由于人口老龄化、房地产市场低迷和潜在的通货紧缩风险等两个经济体面临的共同挑战，人们越来越多地讨论中国是否会走上日本“失去的几十年”的道路。

A: We don't think there is enough evidence yet to suggest that China is in a period of deflation.

Q: There are rising discussions of whether China is about to follow Japan's path of "the lost decades" because of the common challenges facing the two economies, such as the aging population, property market downturn and potential deflation risks.

Despite temporary market woes, data indicates China on road to recoveryAmid the dynamic changes occurring within China's economic landscape, the nation is currently grappling with short-term challenges primarily arising from a weakening domestic property market and the looming risk of deflation.

"While recent policy measures have helped to mitigate economic uncertainty, more stimulus may be needed to trigger consumption and investment growth, and avert deflation concerns.

"While comparisons with Japan's "lost decades" have surfaced due to shared challenges such as an aging population, property market downturn and potential deflation risks, Beirne highlighted key distinctions.

Expert: Growth to have 'creditable showing' in 2023; multifaceted strategy encouragedChina's economy is expected to steadily recover in the fourth quarter and further pick up in 2024, and will be far from nearing a so-called state of deflation, said Hoe Ee Khor, chief economist of the ASEAN+3 Macroeconomic Research Office, or AMRO.

As economic momentum should continue to firm, Khor said China is nowhere near deflation — a condition marked by a sustained decrease in general price levels.

Still, vigilance is required: a prolonged period of demand weakness could lead to supply outstripping demand on a structural basis, which would exacerbate deflation risks.

Stimulus measures that are designed to raise investment, without supporting demand structurally, may ultimately raise deflation risks.

Q: There are rising discussions of whether China is about to follow Japan's path of "the lost decades" because of the common challenges facing the two economies, such as an aging population, property market downturn and potential deflation risks.

Economic indicators show renewed vigor due to positive demand, policy supportChina's economy is positioned for continued recovery given the ongoing policy support and an uptick in economic indicators, keeping any potential risk of deflation at bay, officials and international experts said on Wednesday.

"However, taking into account the price level, demand recovery, economic growth and money supply factors, it can be concluded that there is no so-called deflation in the Chinese economy, and deflation will not occur later on," Cong said at a news conference on Wednesday.

"Hoe Ee Khor, chief economist of the ASEAN+3 Macroeconomic Research Office, said he does not see China anywhere near deflation.

"China's economy is nowhere near a state where the economy is seeing very sluggish demand and low credit or money supply growth – conditions usually associated with deflation.

"We think that low inflation is going to be temporary while deflation is unlikely," said Yothin Jinjarak, senior economist at the Asian Development Bank's resident mission in China.

When it comes to concerns over deflationary risks after the relatively low inflation figures in July, they said China is not entering a period of deflation, and consumer prices will likely pick up gradually from August with steady economic recovery anticipated amid a raft of pro-growth policies taking effect before year-end.

The People's Bank of China, the nation's central bank, said in its second-quarter monetary policy report that China's economy is not witnessing deflation, as the economy continues to recover, and the broad money supply is growing relatively fast.

"Currently, there is no deflation (in China's economy)," the PBOC said in the report released on Aug 17, adding that it is not expecting inflation or deflation to become a problem for China.

Citing data from the National Bureau of Statistics, Wang Jinbin, deputy dean at Renmin University of China's School of Economics, said July's negative CPI growth does not mean deflation for China, especially as core inflation, which excludes volatile food and energy prices, rose by 0.8 percent year-on-year in July, up from a 0.4 percent rise in June.

All they see is a fall in China's consumer price index in July, the first time in more than two years, based on which they've been manufacturing a deflation fear.

Nicholas Lardy, a senior fellow at the Peterson Institute, a US think tank, said that it was "premature" to make a judgment of deflation based on single monthly data, while a thorough assessment of the situation also "does not support the view that China's economic growth is in a severe cyclical downturn.

When it comes to concerns over China's disinflationary pressures, the central bank said China's economy is not witnessing deflation, as the economy continues to recover, and the broad money supply is growing relatively fast.

"Currently, there is no deflation (in China's economy)," the PBOC said in the report, adding that it is not expecting inflation or deflation to become a problem for China.

"There is no deflation for the Chinese economy.

Liu Guoqiang, deputy governor of the People's Bank of China, said in mid-July in response to the country's softening price growth that "we don't see deflation at present and there will not be a deflationary risk in the second half of this year either.

The Chinese economy has recovered steadily, with M2, a broad measure of money supply that covers cash in circulation and all deposits, maintaining a relatively sound growth, which is obviously different from the typical deflation in history, Liu said.

"The negative inflation does not mean deflation for China," said Zhou Maohua, an analyst at China Everbright Bank.

The country's price level has declined but there is no deflation as the economy and broad money supply, or M2, continues to rise, Liu said.

"So, there is no deflation right now and there will not be deflationary risks in the second half of the year. "

Currently, considering the pressure on the employment front and on deflation, further policy should be prioritized to stabilize employment, increase incomes and anchor market expectations," Wang said.

Deflation is not evident in China at present and will not appear in the next stage, as the slow-paced growth in consumer prices is mainly time-limited, senior official said at a news conference on Tuesday.

Regarding the ongoing debate about whether we are in economic recovery or whether deflation runs the risk of derailing a comeback, we clearly state that the current situation is the beginning of an economic recovery, not a deflationary cycle.

The foundation of economic recovery is not yet solid, and we still need to make more efforts to shore up the economy to avoid deflation.

Only by fully boosting the economy can we prevent deflation.

"Deflation is often accompanied by a decrease in the money supply, which is also not the case," Tang added.

"I don't see the risk of deflation here (in China)," Krishna Srinivasan, director of the International Monetary Fund's Asia and Pacific Department, said at a news conference on Thursday.

The downward trend of the price indicators, however, does not point to deflation.

Wang said the manufacturing PMI in April indicates that economic recovery has yet to find a stable footing, as growth still faces challenges, including employment and deflation pressure.

On the one hand, the market is worried that the economy is entering a period of deflation, or decrease in the general price level of goods and services, as China's consumer price index only increased 0.7 percent year-on-year last month while the producer price index was down 2.5 percent.

It can be interpreted that the current declining trend in price growth is not deflation, but is related to base effects, the impact of noneconomic policies on business confidence and a decrease in peoples' risk appetite after the COVID-19 pandemic.

Deflation has a strict definition and refers to sustained and general declines in prices for goods and services, often associated with a contraction in the supply of money and credit in the economy.

Temporary price declines or declines in a few categories of goods cannot be considered deflation.

Deflation is significantly different from normal price fluctuations.

Deflation is often synonymous with economic recession, as there is insufficient overall demand, a large number of idle resources, a rising unemployment rate, a gloomy economic outlook and a continuous decline in prices.

Deflation is caused by insufficient effective demand or excess production capacity.

When an economy experiences deflation, the market fails and strong policy stimulus from the government is needed.

At a press conference this week, Fu Linghui, a spokesperson with the National Bureau of Statistics, said deflation is not evident in China at present and will not appear in the next stage.

Deflation refers to a continuous fall in the general price level, often accompanied by a reduced money supply and economic recession, Fu said.

As the aggregate supply and demand are generally balanced, the monetary conditions are reasonable and moderate, residents' expectations are stable, and there is no long-term deflation or inflation basis in the country, Zou added.

- Deflation is not seen in China at present and will not be seen in the next stage, an official said Tuesday, noting that market supply and demand remained basically stable despite slower price growth.

Deflation refers to a continuous fall in the general price level, often accompanied by reduced money supply and economic recession, said National Bureau of Statistics spokesperson Fu Linghui at a press conference.

"Generally speaking, deflation is not occurring in China," Fu said, citing a mild 1.3 percent year-on-year uptick in the consumer price index (CPI) and a robust 4.5 percent GDP expansion in the first quarter of the year, as well as a relatively fast growth of 12.7 percent in M2, a broad measure of money supply that covers cash in circulation and all deposits, at the end of March.

For the next stage, the prices will recover steadily and there will be no deflation concerns in China, Fu noted.

The third round was rolled out between 2015 and 2016, when deep deflation of global commodities appeared, and crude oil fell by more than 60 percent.

China still faces much pressure in terms of endogenous deflation, which is mainly due to the inadequate economic driving force.

The declining PPI and losses reported by industrial companies have also reflected the pressure of endogenous deflation amid the downward economic trend.

If inflationary pressure worsens amid restrictions on the global commodity supply, responsive measures other than monetary policy should be taken, as tightening monetary policy in such circumstances risks triggering deflation, said Yu, who is also a former member of the PBOC's monetary policy committee.

China's inflation rate has remained low for quite some time, with even deflation reported at times.

The ongoing COVID-19 pandemic has brought about changes to the macroeconomic system of each country and also that of the globe: Inflationary pressure is showing signs of abating while deflation is being seen in parts of the world where money supplies are tightening; low interest rates, even negative rates in some places, are beginning to spread; volatility of economic growth has decreased; deficits and debt have become long-term issues; government bond markets have become a major focus within fiscal and monetary policies; amid calls for de-globalization, countries are slowly weakening transnational economic ties … All these changes are posing challenges to traditional macroeconomic theories and the expert analyses written about global economic and trade issues.

Food categories experienced a 3 percent price deflation, which was offset by a 5.7 percent volume growth to deliver 2.7 percent value growth.

The deflation and value gains resulted from consumers purchasing large quantities of instant noodles, soup mixes and other relatively inexpensive ready-to-eat food categories during the lockdown.

But pressures of both inflation and deflation should not be ignored, said the governor.

In another development, the People's Bank of China noted in its first quarter monetary policy report on Tuesday evening that the country's price level now remains stable overall and does not have the base for long-term inflation or deflation.

If support policy for the economic recovery is withdrawn prematurely, the economy will fall into deflation due to insufficient aggregate demand, accompanied by a new round of economic slide.

The temporary negative CPI growth would not point to deflation as it would be mainly driven by pork prices.

"It is groundless to say that deflation is beginning to take hold," said Wen Bin, chief researcher at China Minsheng Bank.

While the country's inflation is likely to drop further in the coming months, analysts said the decline does not mean that China's economy is facing the risk of deflation or disinflation as the steady recovery of the Chinese economy and the expected price rise in the services sector could help offset the negative effect of falling food prices.

Lu said that the decline in CPI inflation does not mean China is experiencing disinflation or deflation as the drop was mainly driven by pork prices, which was due to the high base as a result of the African swine fever, sequentially weaker pork prices and the increased weighting of pork in the CPI basket.

"We don't see deflation in the baseline," said Thomas Helbling, deputy director of the IMF's Asia Pacific Department.

The United States during the Great Depression of the 1930s and Japan during deflation in the 1990s can both serve as lessons for China in this case.

Ultimately, the US was hit by the Great Depression, and Japan suffered two decades of deflation.

Worries about whether China can sustain growth and overcome the middle-income trap in the medium to long term are not imaginary fears, as there do exist challenges, including debt, deflation and the anti-globalization sentiment.

But, by contrast, with lessons from the past, China — which we don't think will see the same results as Japan in the 1990s — has ample policy options available to avoid a balance sheet recession or deflation.

Measures such as expanding the budget deficit of the central government and the scale of local special debt — and using quasi-fiscal means — will help the nation emerge from the quagmire of potential deflation.

Several domestic and foreign economists have asserted that China has entered a phase of deflation because both the CPI and PPI has reached a range of negative growth.

It is in fact questionable whether China's current economic position can be classified as one that is deflationary as there is no clear definition of deflation and the CPI has only been negative for one month.

Zhu Haibin, JPMorgan's chief China economist, said shifting policy focus may count even more than increasing stimulus measures in addressing a potential risk of deflation if weak demand persists.

Unborrowed savings from this repayment of long-term debt will result in funds sitting idle in the financial sector, and aggregate demand will spiral downward, thus inducing deflation.

But the rising risks from global deflation, volatility in the international financial market and continued geopolitical tensions have posed challenges for the global industrial chain, Fang said.

But the rising risks of global deflation, volatility in the international financial market and continued geopolitical tensions have posed large challenges for the global industrial chain, explained Fang.

However, with the limited rebound in the core consumer price index and the producer price index remaining in negative territory in the first quarter of 2023, there are concerns about the risk of hidden deflation in China.

Issuing monthly economic data on Tuesday, the NBS said that deflation is not evident in China at present and will not appear in the next stage either.

In a statement late on Monday, the PBOC said China's economy is not experiencing a deflation.

The economy is ever improving and does not fit the definition of deflation, the PBOC statement in Chinese said, adding the economy does not exhibit conditions that indicate long-term inflation or deflation.

China's aggregate supply and demand are generally balanced, its monetary conditions are reasonable and moderate, residents' expectations are stable, and there is no long-term deflation or inflation basis in the country, the report said.

China's economy is not witnessing deflation, with its consumer inflation rate likely to recover to the average seen in recent years by the end of 2023, the People's Bank of China, the country's central bank, said on Monday.

"Currently, there is no deflation in China's economy," the PBOC said in its first-quarter monetary policy report, adding the recent moderation in price increases is mainly due to the faster recovery in supply than demand and last year's high comparison base.

In contrast with deflation, which refers to a sustained decrease in prices and a downtrend in money supply, China is experiencing a moderate increase in prices with the core consumer price index rising about 0.7 percent year-on-year and a relatively fast growth in broad money supply and social financing, the PBOC said.

In early October 2020, fearing deflation, Powell said that monetary easing was better because the recovery would be stronger and faster, even if actual policy action exceeded what was needed.

China's central bank said Thursday there is no long-term deflation or inflation basis in the country as the aggregate supply and demand is generally balanced, the monetary conditions are reasonable and moderate, and residents' expectations are stable.

PBOC official says inflation will normalize on demand recoveryChina will continue to implement a prudent monetary policy to support the real economy, and there is no basis for long-term deflation or inflation in China, an official from the country's central bank said at a news conference on Thursday.

Luo Zhiheng, chief economist at Yuekai Securities, said his team believes that the current downtrend in price growth is not deflation but due to a drop in vegetable and fuel prices as well as relatively sluggish durable goods consumption.

Heightened geopolitical tensions between Russia and Ukraine have sparked worries of global economic deflation along with the disrupted global commodities supply chain in oil and natural gas among others.

Sixth, central banks should carefully manage money supply as either deflation or inflation may cause systemic economic and financial risks.

As China is shifting into a high-quality development phase and optimizing the economic structure, modern central banking is expected to be a crucial pillar that supports the transformation of the growth model and prevents inflation or deflation as well as systemic financial risks.

With the impact of COVID-19, intensified inflation or deflation needs to be prevented during the economic recovery, according to the article from PBOC Monetary Policy Department.