sábado, 27 de diciembre de 2014

sábado, diciembre 27, 2014

December 24, 2014 11:29 am
 
Causes and consequences of China’s contagious case of deflation
 

Monetary policy might not be enough and governments may be forced to step in, writes George Magnus
 
 
The 50 per cent fall in oil prices this year is self-evidently good news for all but oil-producing states, regions and companies. It also reminds us that the world economy is deflation-prone — both because of deficient demand in Europe, Japan and several big emerging markets and because China’s deflation, rooted in excess capacity, is structural and of growing significance.
 
A persistent and as yet unfinished slowdown in the country’s economic growth has been accompanied by the emergence of substantial overcapacity, a significant rise in non-financial corporate debt and a big drop in inflation. Between 2011 and November 2014, Chinese producer prices fell by 10 per cent — the annual change has been negative for 33 months — and the annual rate of consumer price inflation has fallen from 6 per cent to 1.4 per cent over the same period.

The ratio of output to capacity in many sectors — for example, steel, plate glass, construction materials, chemicals and fertilisers, aluminium, shipbuilding, and solar panel and wind turbine manufacturing — has fallen sharply. Last year it was about 70-72 per cent, and it is likely to have dropped further since. Property was the main beneficiary of the post-2008 investment and credit surge, accounting for about 16 per cent of China’s gross domestic product directly; it is now in a secular downturn. Inventories of unsold homes in many cities outside Beijing, Shanghai and Shenzhen have risen sharply to between 25 and 40 months of supply.
 
China’s nominal GDP growth has roughly halved since 2011 to 8 per cent this year, and the aggregate debt to GDP ratio has risen by 80 percentage points to 250 per cent. The increased burden of debt has been exacerbated by passive tightening from the rise in real interest rates.
 
These have doubled to 4 per cent, deflated by consumer prices; and surged from zero to 8 per cent, using producer prices. The share of interest payments in GDP has doubled to about 15 per cent. Although credit expansion is slowing, it is still running at almost twice the rate of nominal GDP, and much is probably sustaining excess capacity to avoid shutdowns and job losses.
 
The persistence of excess capacity will sustain China’s deflation, aided and abetted by a cosseted financial system, a closed capital account and financial privileges enjoyed by state enterprises. The escape from this environment is likely to be protracted, and perhaps even troublesome at times. The People’s Bank of China has been adding liquidity for some months, and recently cut interest rates for the first time in three years. It will doubtless continue along an easing path in 2015, but monetary balm is no substitute for capacity closure and debt restructuring.

The consequences of China’s deflation problems are ubiquitous and spilling into the rest of the world. Slower economic growth and a steady decline in the economy’s commodity intensity is already affecting commodity producers from Perth to Peru, with negative multiplier effects arising from lower revenues and reduced capital spending by resource companies. Moreover, as Chinese companies cut prices to clear excess supply, global competitive pressures intensify, forcing foreign manufacturers to do so too.

Further, the shift in China’s growth and its economic development model has led to an abrupt drop in import demand. After a fourfold rise between 2006 and 2012, imports have been treading water. At the end of 2014 they were about 15 per cent lower than at the start of the year. This is affecting not just commodity exporters but also Asian countries in China’s supply chains, and an array of advanced and emerging countries that have prioritised selling goods to China.

Additional deflationary pressures may yet be transmitted into the global economy in 2015 through depreciation of the renminbi. The combination of deflationary economic headwinds, looser monetary policy and a rising US dollar are likely to result in a weaker currency. The 50 per cent depreciation of the Japanese yen, so far, could yet be consequential, too. It is starting to lead to weakness in other Asian currencies, and it would be surprising if the renminbi were not allowed to weaken to compensate.

China’s structural deflation, along with factors such as excess debt and rapid ageing, will continue to have repercussions for monetary policy in advanced economies. Nine European countries, including Italy and France, are already experiencing mild deflation, and others may soon join them. Japan has won only a brief deflation respite from the fall in the yen, and by mid-2015 “lowflation” in the US and the UK could have dropped to zero.

The US Federal Reserve and other western central banks have failed to anticipate this deflation environment, persistently undershoot their inflation targets and appear powerless to reverse the trend. At some point, we will probably wonder if it is time for the anti-deflation baton to pass to governments.


The writer is a senior independent economic adviser to UBS

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