Language : English 简体 繁體

China Is not Exporting Deflation

Nov 11 , 2015
  • He Yafei

    Former Vice Minister, Ministry of Foreign Affairs

Global economic recovery has been sluggish ever since the onslaught of financial crisis of 2008; actually it has been the slowest as compared with recoveries after each economic crisis since the Great Depression. There are two major problems involved: One is the anemic growth and the other is deflation.


President Xi Jinping of China puts it wisely and succinctly when he talks about China’s role as the rotating chair of the G20 in 2016, that it is paramount for the G20 to address the most pressing macro-economic problems in order to maintain steady growth of world economy.

In general, the financial crisis has destroyed the driving forces of economic growth while new ones are yet to appear which forced fundamental changes in global economy both at macro and micro economic levels. It is safe to say that global economy will experience a “new normal” of low-to-medium growth for some time to come.

The IMF in its World Economic Outlook published last October once again lowered world GDP growth to 3.1% for 2015, indicating continued downward pressure on major economies from investment, consumption and export. Most economists project 3%-3.5% global GDP growth for the foreseeable future. WTO’s forecast about world trade growth is 4% for 2015, a much smaller figure compared with the 10-year average of 6.7% before the crisis. Indeed not a very promising situation to look forward to!

Let’s take a look at major economies first. For the United States, its economic recovery is the fastest among OECD countries but still disappointingly slow despite three rounds of QEs by Federal Reserve to repurchase over $3 trillion in Treasury bonds and mortgage-backed securities. For the last five years, the S&P 500 companies’ annual earnings averaged 6.9%, much lower than prior to the financial crisis. What is more revealing: Only half of these earnings come from real business operation and the other half from buying back their own shares to boost their stocks. From the end of 2007 to 2014 the accumulated GDP growth in the US is 8.7% while private investment grew only by 4.3% for the same period.

This tells us only one thing, that US investment in real economy is very weak for fears of low returns and uncertainty of turning investment into cash quickly in case of another crisis. American productivity also slowed to an average of less than 0.5% from 2011 to 2014, leading to stagnation of wage increases.

The picture for Europe and Japan is even bleaker. EU has been hit by both slow recovery and a deepening debt crisis except for Germany and a few Nordic countries. Its unemployment rate has hovered around 10% for a long time. Japan’s economy has been in low trough for over two decades with its official debt ratio to GDP well over 200%. Japan’s economy has been irreversibly bogged down by the aging of its population, rigidity of its economic structure and sliding productivity.

Emerging markets fare better than developed economies as a whole, but the economic cycles and bottlenecks that choke growth appear in clusters, resulting in slower growth amid greater uncertainty.
It is obvious that the global economic landscape is changing as developing nations are catching up with developed ones fast in terms of aggregate GDP and a faster growth rate. This is euphemistically called “gravity shift”, meaning emerging economies perform better than their developed brethrens and now contribute over 50% to annual global growth with China alone putting in 30% and more for 5 years running. At the beginning of the 21st century, the contributions to global economic growth by developed and developing nations are 80% and 20% respectively, but by 2013 the figures were totally reversed to be 19% and 81%.

Unfortunately emerging markets also have met headwinds, with their growth slowing down considerably as a whole. IMF lowered its forecast for their growth this year to 4% as a group, a sharp drop of 4.5% as compared with 2010. The primary obstacles include:

1. Deterioration of the global economy with slow recovery and shrinking export markets in developed nations;
2. With a stronger US Dollar and pending rate hike by Federal Reserve, overseas debts denominated in USD become heavier and risks for defaults are increasing. Total global debt rose to $57 trillion since 2007 and the debt for developing nations has doubled since then;
3. Prices of bulk commodities have gone down, which hit hard those developing countries dependent on their exports. Take petroleum for example. It was $110 per barrel in 2014 and now is down to less than $50 per barrel.
4. Geopolitical upheavals in the Middle East, East Africa, and Ukraine have also created impediments to economic recovery not only in the regions affected, but also added uncertainty and risks to global trade in natural resources as these regions happen to be rich in such resources.

Deflation risks are growing to further threaten global economic recovery. Both developed and developing economies are under deflationary pressure right now. The US inflation rate is under the 2% target set by the Federal Reserve, while the EU’s inflation rate is close to zero and even went into negative territory some time ago. That is against the backdrop of large-scale QEs by both the Fed and the European Central Bank.

The Morgan Global Inflation Index shows that deflation has been the order of the day all over the world the last few years, with a meager 1.6% for the 2nd quarter of 2015. This is not only lower than the 2% benchmark at the end of 2014, but also alarmingly low compared with the global average of 11% during the period from 1990 to 2013. Many economists are afraid that deflation threatens to engulf the world in the next couple of years, further darkening the prospect of global economic recovery.

Most worrisome is the fact that more pressure on deflation is on the horizon and there is no good news at all. The Fed’s “other shoe” of rate increase is going to drop soon or later, which coupled with a stronger dollar has already upset the apple cart by attracting a large capital inflow into the US and causing drastic financial market fluctuations.

Being the major reserve currency, the alternate cycles of a strong and weak US dollar play a determining role in global financial as well as economic periodic shifts. The Fed’s exit from QEs last year signals the end of 10 years’ weak dollar cycle and the beginning of a strong dollar cycle that may last a few years. The downward pressure of the strong dollar on global prices is writing on the wall, especially regarding the sliding prices of bulk commodities worldwide, including copper, iron ore, and petroleum.

For the last three years, the Bloomberg Bulk Commodity Index registered a drop of 40% while the Global Primary Goods Index decreased from 180 points in early 2014 to 124 by the end of July 2015, a drop of 36.7%. Brent Oil, for instance, went down from $103.19/b in August 2014 to less than $45 /b, a drop of 56%.

Some people ascribe the rampant deflation to China’s shrinking demand for bulk commodities and expanding exports of consumer goods worldwide. There is definitely no basis for such claims.

A study done in 2013 by Sandra Eickmeier and Markus Kuhnlenz, both economists from the German Central Bank, concluded convincingly that the “supply shock” from cheap Chinese goods explained on average 1% of changes in consumer prices outside China from 2002 to 2011, while the “demand shock” from China’s rapid growth accounted for 3.6% of changes in global consumer prices. About 95% of swings in global inflation were due to non-Chinese factors. Quite revealing!

Another accusation, that the RMB’s appreciation or depreciation has a dramatic effect on global prices fluctuations or deflation, also has little basis in fact in reality. The truth is that even though RMB some time ago depreciated almost 3% against the US dollar, it has overall appreciated 13% in one year ending July 2015.

The Chinese economy has entered a new normal that stresses quality over quantitative growth. The CPC’s Fifth Session, just concluded a few weeks ago, certified the policy of an innovative, coordinated, green, open and shared economic growth path that China will follow in the “13th Five Year Plan” beginning in 2016. Even the new normal boasts an annual GDP growth at around 7% which translates into a $700 billion or more net increase a year to China’s GDP, almost equaling a year’s GDP for a mid-sized country. There is really nothing to worry about China’s economic future. Actually China is among the few shining stars in an otherwise quite gloomy outlook for the global economy.

You might also like
Back to Top