Index > Briefing
Monday, November 15, 2021
Stagflation Poses Challenges to China's Macro Policy

The October economic data released by China’s National Bureau of Statistics (NBS) showed that the increase in CPI and PPI has both expanded. Among them, CPI rose 1.5% year-on-year, an increase of 0.8 percentage points from the previous month; while PPI rose 13.5% year-on-year, an increase of 2.8 percentage points from the previous month. It is worth noting that the price-scissors difference between PPI and CPI reached 12 percentage points, a record high. In this regard, there is a concern within China’s domestic market that the country's economic growth rate slowed in the third quarter (year-on-year growth of 4.9%), but the PPI continued to rise strongly and transmitted to the CPI, which is likely to lead to stagflation within the country.

Researchers from ANBOUND noticed that NBS spokesperson Fu Linghui actually talked about stagflation on November 15 at a State Council Information Office press conference. He said that because of the slowdown in economic growth, the PPI rises and is transmitted to the CPI, which shows signs of stagflation. However, he also mentioned this is only on the surface, as it is caused by short-term shock factors, which only lasts for a certain period. He noted that considering China’s economic growth and price conditions, its economy is expected to continue to recover steadily, and consumer prices will continue to rise moderately.

Although the statement made by the NBS official in answering the question of stagflation was ambiguous, the possibility of stagflation in China is still being acknowledged. The recognition of this fact is not ignored in China’s official discourse. Regarding the "scissors gap" between PPI and CPI reaching a new high, Fu said this was mainly due to the expansion of PPI growth. The sharp increase in PPI this round is mainly because of the prices of production materials, impacted by the rising prices of upstream industries. In October, international energy prices rose by 16.1% month-on-month, which has impacted imports. In October, the petroleum, coal and other fuel processing industries in the PPI rose by 53% year-on-year, and the prices of chemical raw materials and chemical products manufacturing rose by 31.5%. At the same time, the supply of China’s coal and metal industries was tight. It was also in October that the price of coal mining and coal washing industry in the PPI rose by 103.7% year-on-year, and the price of steel rose by 39.9%.

If China's economic growth rate accelerates while energy and resource prices fall, the country will be in an ideal position to avoid stagflation. However, the situation in China for these two aspects is not exactly encouraging. For starters, the economic growth rate in the first three quarters has dropped significantly. The economic growth rate of 4.9% in the third quarter may not be the lowest this year. The slowdown in growth is likely to continue into the first half of next year. Many institutions have lowered their expectations for China’s economic growth this year and next year. Goldman Sachs for instance, stated in the latest research report that China’s actual GDP growth rate next year is expected to be 4.8%, while the average annual growth rate from 2022 to 2025 is only 4.5%, far below the market average forecast.

The outlook for energy and resource prices has deteriorated. The “upstream industry” effect mentioned by ANBOUND has now become a trend, and it would be difficult to see changes in the short term. As a “world factory” that relies heavily on international energy and resources, China has no control over the price increases of external upstream resources and can only accept the price increases in the international market passively.

Among several possible combinations facing the Chinese economy, stagflation is the worst, as stagflation has a major bearing on people's livelihood. If this situation continues, it will significantly affect the lives of ordinary people and may even become a social problem. This in turn, can be a daunting challenge to the next macroeconomic policy. If the macroeconomic policies are handled well, then the economy can resume its stable operation; if not handled well, stagflation will worsen, and it may impact the livelihood of some people causing them to suffer. Therefore, the relevant Chinese authorities should not underestimate the impact of stagflation.

What we want to emphasize is that the possibility of stagflation in the economy proves that macro-control has not been done satisfactorily and that the situation has not been resolved or alleviated by proper policy management. Looking at the world's modern economic history, the ideal macro-control should establish a reasonable policy goal and then use it to measure its success. ANBOUND has long emphasized that macro-control has always been about fine-tuning, which is to use minor redressing to guide market adjustments and maintain market stability. On the other hand, if macro-control is not carried out smoothly, it would be the worst type of macro-control.

Final analysis conclusion:

ANBOUND has always been emphasizing on stability, and this not only refers to the macro policy objectives to maintain sustained and stable growth but also refers to the method and scale of policy regulation. Policy departments should use fine-tuning to maintain this aim to sustain the stability of economic growth, which in turn, will support the stability of the market and the society.