MNI INTERVIEW:Little Global Deflationary Threat From China-IMF

Fears that China will export deflation to the world are overblown, with the country’s inflation 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 will turn positive this year and is likely to reach 1.4% y/y, 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.”

Still, while demand is recovering, Beijing could add downward price pressure globally unless it scales back financial support to industry and state-owned enterprises, Klein argued.

“We remain concerned that 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.

INDUSTRIAL STRATEGY

Economists have warned that 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 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.