Slowing Growth and Inflation Woes

Published on Author barrettf17

It is not a secret that China’s economic growth is slowing. In addition this slowdown, China’s inflation is significantly below its target level. In most situations, slow growth and low inflation would seem like the ideal time for an economic stimulus, but in China the situation is not quite that simple. This is because China’s growth is slowing, but it is still above what many economists consider to be healthy and sustainable level of growth. These economists fear that increases in credit will only end up further fueling bubbles, such as what happened with the real estate bubble which burst in China in 2011. Expansions in credit so far have done relatively little to spur growth and inflation because investment has not been flowing into new resources and capital for growth.

Despite the fears of fueling speculative bubbles, China continues to move towards monetary stimuli from its central bank. The Central bank of China recently announced its plans to inject 200 billion yuan ($32.7 billion) into approximately twenty local and regional banks. This stimulus is after a 500 billion yuan injection to the nation’s five largest banks last month. The Central Bank is hoping that responsible and reasonable monetary action can increase confidence in the China’s financial markets while spurring inflation and growth. China is put in an odd position because of the intricacies of its economy and its overall growth patterns in the last couple years. It needs a stimulus, but there must be caution to guarantee that monetary action does not fuel unhealthy and unsustainable expansion. Whether China’s current monetary actions will be enough to stop their slowing growth and low levels of inflation will reveal itself in the coming months.


2 Responses to Slowing Growth and Inflation Woes

  1. I listened to an interview on BBC Business world discussing this situation and the problem with investors in China being underwhelmed by the return on investment and therefore keeping investment lower than expected in the Chinese economy.

  2. In an economy with feverish growth, returns should at least match the rate at which demand is growing. So if returns are 10% pa, and good investments do far better, then China’s interest rates, which have been in low single digits, were not a barrier to investment. Going from low to very low isn’t isn’t Now such “financial repression” is common in developing countries; monetary policy tends to focus on direct controls over credit creation, not interest rates. More on this later in the term.