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Stagflation is far from China’s economic reality

Updated: Apr 12,2016 2:14 PM

On April 11, the National Bureau of Statistics released the Consumer Price Index (CPI) of March, showing a 2.3 percent year on year growth, the highest in the past 20 months.

Rising prices amid downward economic pressures led some people to worry about possible stagflation. In fact, considering seasonal factors that have impact on prices, China’s price level remains reasonable.

The current situation of the world’s second largest economy and historical precedence indicate that China’s economy still has huge potential and stagflation is far from the reality.

Moderate price variation in Q1

According to the National Bureau of Statistics’ data, CPI rose 1.8 percent, 2.3 percent, and 2.3 percent in the first three months of 2016, and the average increase during the period was 2.1 percent.

Pork prices contributed largely to price hikes in the first quarter, but its impact will decrease slightly. As the weather turns warmer, vegetable supplies in the north will increase, which will gradually relieve the pressure of rising vegetable prices.

“In addition to the impact on food prices, large credit scale, intense holiday consumption, and seasonal features of production and trade also have influences on CPI in the first quarter. Considering these factors, price levels in the first quarter stayed within a reasonable range and their momentum is also moderate,” said Zhao Xijun, a financial professor from Renmin University.

Stagflation impossible

Rumors of China’s stagflation are not new. But seriously speaking, to figure out whether China really faces stagflation, we should first be clear about what is stagflation?

A country’s economy can be defined as stagflation if three conditions are met: persistent high pressure and high inflation level, high unemployment rate, and economic stagnation with low growth.

Does China meet such conditions? Apparently not. From China’s macro-economic indicators, stagflation is impossible. The nation’s price level variation is moderate, as the highest recent level is only 2.3 percent. Urban unemployment rate is low, as data from the Ministry of Human Resources and Social Security shows a rate of 4.05 percent in 2015. Furthermore, China’s economic performance ranks top in the world, with 6.5 to 7 percent economic growth.

Historical lessons tell us of four kinds of stagflation: supply shock of the 1970s, national upheaval of this century, exchange rate collapse in emerging markets, and Japan’s tax reform in 2014. China’s current economy does not fit into any of these types.

Stagflation is also impossible in the future, as the 13th Five-Year Plan offers guidance on new models and platforms for economic development.

Room for economic development

The good momentum of China’s economy should be given attention. Data from the National Bureau of Statistics shows that Producer Price Index (PPI) in March rose 0.5 percent from February, the first such increase since January 2014.

The positive change in PPI is a significant direction for future development of entire industrial and manufacturing sectors, indicating that currently positive economic factors are accumulating, said Lian Ping, chief economist from the Bank of Communications.

According to David Cruickshank, global chairman of Deloitte, China’s New Normal will increase demand for consumption and service industries and consumption alone can make contributions of 3 to 4 percent in GDP growth. Also, infrastructure development in China’s west regions and educational and medical developments will enhance China’s economy and increase its global competitiveness.

In addition, China’s manufacturing industry has huge potential, and the automobile industry, robot, sensor, and 3D printing technologies offer great opportunities, he said.