The latest National Bureau of Statistics has released the most recent Consumer Price Index (CPI) and Producer Price Index (PPI) data for the country. Following the release of this data, it has sparked intense discussions among domestic economists, with many considering a single question: How can China free itself from the troubles of "quasi-deflation"?
The debate over "deflation" in China continues.
According to the data, the CPI for January rose by 0.3% month-on-month, but it decreased by 0.8% year-on-year, which is a 0.5% larger decline than the previous month. If we include the previous three months, this marks the fourth consecutive month where the year-on-year growth rate of the CPI index has been negative.
So, how should we view this data? Is the negative CPI related to the holiday season? What does low inflation mean for China? And how should we overcome these difficulties? How should the average person respond?
Low inflation continues to plague our country; how can we overcome these difficulties?
Since many media outlets are reluctant to use the term "deflation" to discuss issues related to the CPI, we will use "low inflation" as a substitute. Looking at the data from the past six months, the issue of low inflation has been troubling the Chinese economy.
From the general data, we can clearly see that domestically, whether it is service prices or core consumer prices, the prices of all consumer goods, as well as commodity prices, have shown a trend of fluctuating declines.
The situation of price changes in China's four major categories of goods.
This also means that, theoretically, the prices of goods we buy in society will not increase, and may even be lower than before.
Many friends will ask, if the prices of goods are lower, isn't that a good thing? So why is low inflation said to trouble the Chinese economy?In simple terms, CPI stands for the Consumer Price Index. In a normal economic society, maintaining a certain growth in the CPI index is actually the healthiest, reflecting a healthy balance between social demand and supply, continuous economic development, positive growth in people's wealth, businesses receiving orders, and residents willing to consume. This is the most desirable situation.
However, when the CPI index turns negative, it means that there is no demand for goods in society, forcing businesses or service providers to reduce prices and offer big promotions. While this practice may bring benefits to the general public, it is a disaster for business producers.
In January, both the CPI and PPI indices showed signs of weakening.
To illustrate with a simple example, in the past, the prices of pork and mutton were very high. We had to spend a lot of money to buy pork, but at that time, the debt ratio and financial health of the general public were actually better than they are now. Farmers raising pigs and sheep were also making a lot of money.
However, this year, the prices of pork and mutton have dropped significantly. It may seem that the general public has gained a lot, and the CPI index is also very low, leading to China not having inflation worries similar to those in the United States. But pig farmers are suffering heavy losses.
According to a CCTV investigation, the pork market was not booming in January as expected.
Similar situations also occur in various industries. If a product is popular and in high demand, its price will not decrease. It is only when there is insufficient domestic demand or a mismatch between demand and supply that the CPI index will continue to be lowered.
Therefore, this raises a question: when low inflation or quasi-deflation continues to plague China, how should we respond? How can we overcome deflation?
Overcoming deflation? Stimulating domestic demand is key?
In fact, the authorities have already taken action on this issue. From the central bank's quarterly report, we can see that as the policymakers of monetary policy, the central bank has been using monetary policy to maintain market liquidity and stimulate domestic demand.The central bank report mentioned: The central bank and the China Securities Regulatory Commission, through measures such as lowering reserve requirements, structural interest rate cuts, mortgage supplement loans, and Central Huijin entering the market, have boosted domestic demand and enhanced economic resilience to stimulate the domestic economy.
The central bank announced a 0.5% reduction in reserve requirements, releasing 1 trillion yuan in long-term funds.
However, the main contradiction in the domestic economy is still the weak consumer spending, insufficient demand, and lack of confidence leading to insufficient domestic demand momentum. Even the prices of food, which are necessities of life, are very weak.
For example, food prices fell by 5.9% year-on-year in January, pork prices fell by 17.3%, and fresh vegetable prices fell by 12.7%, etc. These are all phenomena caused by insufficient demand.
What is the goal of solving this? Is it to reduce supply? In fact, it is not. Our goal is still to expand demand. In 2023, we have issued many favorable policies to deal with quasi-deflation issues, but in 2024, in order to completely get rid of the quasi-deflation crisis, we still need more favorable policies.
First, resolutely take action to issue favorable policies to boost residents' confidence.
There is an old saying that confidence is more important than gold. The fundamental reason for the emergence of quasi-deflation is still the lack of confidence of many residents and families in the future development of China's economy, leading to residents' willingness to save more than their willingness to consume, which leads to insufficient domestic demand. If this part of the deposits and savings can be released, then our domestic quasi-pass-through crisis can be effectively alleviated.
China is not short of money, more money has been saved.
After all, in the whole year of 2023, the deposits of Chinese residents increased by 25.74 trillion yuan, not counting the previous stock of deposits. Therefore, although our people are still "short of money", most of the money is actually saved up. From the numbers, we are not short of money.
Second, increase the intensity of monetary and fiscal policies to more effectively stimulate the economy.From the recent national team's efforts to rescue the A-share market, it can be observed that we tend to release favorable policies when faced with severe dangers, in order to increase the intensity of stimulus. However, for the relatively slow yet significant threat of quasi-deflation, we need to be vigilant, as the 30-year recession in Japan was largely due to insufficient attention to the threat of deflation at the time.
Persistently low prices bring deflationary pressure to Japan.
In terms of monetary policy, we should continue to significantly increase the intensity of reserve requirement ratio cuts and interest rate reductions. While ensuring that the negative factor of financial self-rotation is controllable, we should intensify efforts to stimulate market liquidity. Reserve requirement ratio cuts and interest rate reductions should be implemented as soon as possible and as early as possible to demonstrate a strong determination to stimulate the economy to the market.
In the fiscal policy area, where we have previously exerted less effort, we should also continue to intensify stimulus. We previously mentioned that the United States' excessive debt to stimulate the economy is not good. However, this is because the United States' fiscal deficit rate is as high as about 6%, with total debt exceeding $34 trillion.
China's deficit rate has just broken through 3%, and if the economy warms up, this part of the deficit can be made up in the next fiscal year, so the problem is not too significant. Therefore, when the market is looking forward to larger and more frequent favorable policies, we should follow market demand and carry out more powerful counter-cyclical adjustments.
Third, boost foreign trade, the real estate industry, and the capital market.
China's economy has three engines, one of which is the foreign trade sector. For foreign trade, there is a huge favorable factor in 2024, which is the Federal Reserve's interest rate cut. Although it currently seems that the timing of the rate cut will be postponed to May, it is highly likely that there will be a rate cut of about 150 basis points this year.
In 2024, the recovery of foreign trade is highly probable.
The interest rate cut will promote the recovery of the global economy and increase the purchasing power of countries around the world, which is of great help for the recovery of China's foreign trade sector. This is beneficial for boosting China's foreign trade and using external demand to stimulate the economy.
As for the real estate industry, we still need to continue to release favorable policies. The past three years have been relatively difficult for the real estate industry, with a series of favorable policies issued each year, including providing loan support, ensuring the completion of buildings, preventing real estate companies from going bankrupt, and promoting and stimulating housing demand, etc.The year 2024 is also a pivotal year for the real estate industry. Will the industry be able to achieve a soft landing this year? And subsequently, will it reach its bottom and start to warm up? This is something we must pay attention to, after all, real estate is a large reservoir of capital. If this industry recovers, the consumption confidence of the domestic middle class will also return.
As for the A-share market, the national team, including Central Huijin, has already entered the market, pulling off three consecutive days of gains. This has already highlighted the determination of the higher-ups to rescue the market, which we will not elaborate on here. Because the capital market, like the real estate market, is closely related to most ordinary people. After all, the number of Chinese stock investors has already reached 220 million.
In summary, since last year, our country has been affected and threatened by deflation-like conditions or insufficient inflation growth. Although the impact of deflation-like conditions is not the most urgent, from a long-term perspective, it will continue to plague the high-speed recovery of China's economy.
Therefore, from a macro perspective, we need to be vigilant about the continuation of such situations. For us ordinary people, there are also some measures to cope with them:
For example, by changing our lifestyle, as much as possible, change the past extravagant consumption habits, reduce unnecessary shopping, save water and electricity, and try to take public transportation such as subways when going out; in addition, in a deflation-like environment, the market's unemployment rate will be relatively high, employment is more difficult, and salary treatment is not particularly high. So more is to save.
In terms of increasing income, whether it is participating in various skill training, doing self-media, improving one's professional skills, it is a good way to improve oneself, and continuously exploring side business channels can also increase one's income.
With the continuous release of policy dividends, China's economy will get better and better!
In summary, at present, the domestic economy is still in a state of deflation-like conditions, with insufficient social demand and relatively excessive supply still being the main contradiction in the country. While we hope that the central bank's departments will continue to release more and denser benefits, we also need to exert subjective initiative. Those with money should look at more projects, and those without money should engage in side businesses.