China can beat deflation if it really wants to

Comments on Yu Yongding "Can China beat deflation?" 23/07/2015

As this post suggested China may face an extended period of deflation with a negative impact on economic growth, amid its structural reforms.

It seems sensible to have expansionary of both monetary and fiscal policies to head off potentially very serious deflation and excessively slowing in the economic growth, as the author has called for, that "China must do whatever it takes to avoid falling into the debt-deflation trap".

Structural reforms should, in the short term, be done in the context of stimulating economic growth and combating deflation. There should be enough room in China for it to invest, given that China's capital stocks are still low in not only infrastructure in many locations with the need of continued urbanisation, but also in the short components of its structural imbalance. Understandably, China is still far from a high income country and it will take many years and decades to catch up with the levels of high income industrialised countries. Capital labour ratio in China is arguably still equally low as its per capita income. That indicates the needs for increasing its capital stocks not only in aggregate sense, nut particularly in the under balanced areas of its economy.

It is, however, important to channel the monetary and fiscal expansions into the right areas of the real economy and prevent any excessive flow to its stock market for speculative activities.

Although the housing market in China has seen very high property prices and the authorities have tried to dampen its further growth, the housing construction sector still have room to expand.

Furthermore, its services sector has plenty of room to expand and its growth can be combined with the Chinese leadership's push for innovation and promoting enterprenourship.

In summary, China needs expantionary fiscal and monetary policies to stimulate the growth of the economy and address deflationary pressures. Structural reforms and adjustments, in the short to medium terms, need to be done in that overarching context. In both the short and long terms, China should not loose sight that its income is low, so is its capital labour ratio. The main focus of structural adjustments, particularly in the short term, should be on expanding infrastructure (including housing in cities and towns where further urbanisation will see a rapid increase in resident population and the capacities of the services sector.