(CORRECTED) MNI: IMF Not Expecting Persistent China Deflation

(Correction removes implication that IMF comments indicated Chinese exports would not have deflationary pressure on global economy)

The IMF does not expect persistent deflation in China, with the country's CPI likely to move out of negative territory as domestic demand picks up and the drag from commodity prices wanes, the International Monetary Fund's deputy mission chief for China told MNI.

Chinese inflation is likely to reach 1.4% y/y in 2024, while declines in producer prices, which slid 2.5% y/y in January for their 16th straight monthly fall, have mainly been driven by global factors, Nir Klein said in an interview.

"China's producer price developments are not unusual from a long-term perspective," he said. "While they have moderated more recently owing in part to lower energy prices, such developments are also evident in other major economies, including the EU."

When asked about China’s state interventions in new growth drivers such as advanced manufacturing and electric vehicles, Klein pointed to the risk of excess capacity in these sectors and argued that the IMF advocated in its latest annual economic assessment report that China should scale back industrial policies and reform State-owned enterprises.

"We remain concerned this type of state intervention has the potential to contribute to excess capacity in targeted sectors, even if some is aimed at addressing clear market failures," he said. However Klein did not comment on the impact such excess capacity could have on global deflationary pressure.

CPI fell 0.8% y/y in January, falling further from December's 0.3% decline to hit the lowest level since September 2009, according to latest data.

INDUSTRIAL STRATEGY

Economists have warned China's combination of low domestic demand and excess industrial capacity could exert disinflationary pressure on the world economy after export prices hit a 14-year low in 2023. (See: MNI INTERVIEW: ECB May Cut Less, Slow Balance Sheet Run of May Cut Less, Slow Balance Sheet Runoff)

The IMF has called on China to scale back industrial policies supporting state-owned enterprises, such as implicit guarantees, cost advantages, and preferential access to credit, while fostering the orderly closure of unprofitable enterprises.

Last month, IMF Head Kristalina Georgieva warned central banks against premature easing in Davos, noting early rate cuts would reverse gains on fighting inflation.