MNI INTERVIEW:China Deflation Effect Demand Driven-RBNZ Conway

The nature of China’s transmission of disinflationary pressure to the world has changed from a supply- to demand-side effect as its economy slows, however, this will not represent a mid- to long-term reliable source of deflation, the Reserve Bank of New Zealand’s chief economist told MNI.

Pointing to recent talk among some economists of China exporting deflation due to overcapacity and weakening domestic demand (See MNI INTERVIEW: ECB May Cut Less, Slow Balance Sheet Runoff), Paul Conway noted China’s impact on the world had shifted.

“[China] was the workshop of the world, they could do things cheaply because it was a low-wage economy and so they were exporting deflation for decades, but now it’s more of a demand-side effect,” he added. “The Chinese economy is much slower than it was, so it's making less of a sucking sound in terms of commodities and resources.”

He added, however, that this would not produce a dependable long-run disinflationary force like that exerted by China in decades before the pandemic.

During a press conference following the RBNZ’s fifth consecutive decision to hold the cash rate at 5.5% last week (See MNI RBNZ WATCH: RBNZ Leaves Rates On Hold, Downgrades OCR Peak), Governor Adrian Orr noted China’s “deflation dividend” had likely run its course.

“China is now at an inflection point in its middle income, where just producing the same thing cheaper, or just using more and more inputs to produce things is no longer going to make their economic way forward," Orr noted, adding slower economic growth and falling demand would put downward pressure on aggregate inflation.

Conway added lower deflationary pressure from China’s supply-side effect represented a “medium-to-long run slow burn-issue."

Conway also told MNI that the RBNZ would likely not cut the Official Cash Rate in 2024.