Liao Qun is the Chief Economist of Sino Group, the Director of the Economic Research Center of Hainan University, the Senior Research Fellow of the Chongyang Institute for Financial Studies of Chinese University, and the Director of the China Chief Economist Forum
Deflation, also known as deflation, refers to the phenomenon that the social level continues to decline and the value of money continues to rise. Regarding the judging criteria, it is generally believed that if the consumer price index (CPI) falls for two consecutive quarters, it means that the economy is deflationary. But this is only about the deflation of consumer goods in a narrow sense, and deflation in a broad sense should also include economic factors other than consumer goods, especially assets, including real estate and financial assets such as **. In fact, sometimes the deflation of assets has a greater impact on the economy than the deflation of consumer goods.
Deflation and inflation, i.e. inflation, are opposite. Whether deflation or inflation is the main threat to an economy depends on the aggregate supply and demand structure of the economy. For economies that are in short supply, of course, inflation is the main threat, just like our economy before the mid-90s of the last century and most of today's developing economies; Deflation is naturally the main threat to economies with oversupply or overcapacity, just like China's economy and most developed economies except in special periods since the beginning of the new century.
As far as China's economy is concerned, the CPI has been below 2% for most of the time since the new century; This level is relatively low compared to the economic growth rate of more than 6% in most of the time, so China has already entered the stage of low inflation of consumer goods. But at the same time, real estate is soaring, and it has soared dozens of times since the housing reform; In view of the fact that real estate accounts for about 65% of the total assets of Chinese residents, although it is turbulent and sluggish, it can be said that China's assets and consumer goods are in a stage of high inflation on the contrary before the year.
However, the situation has changed a lot in recent years. Under the combined effect of various factors, the situation of low inflation in consumer goods has further developed and is moving in the direction of narrow deflation. In 2023, China's CPI will rank first in the whole year.
I. The year-over-year changes in the second, third and fourth quarters were: andAccording to the standard definition, it has entered the narrow deflation range. While the month has improved compared to the month, it remains to be seen whether the year will continue to improve, and even if it can, it will be below 1% for a longer period of time. The situation with assets is much more serious, with real estate** declining sharply for two consecutive years; ** It has fallen heavily year after year at an already low level. Considering the situation of consumer goods and assets, the threat of broad deflation in China is not small at present.
Indeed, the threat of deflation has become a problem in China's economy that is as serious as the downturn in economic growth and is mutually reinforcing. How do the threat of deflation and the slowdown in economic growth mutually reinforcing? In particular, how does deflation have a negative impact on our economy? This should be fully estimated, and it should be assessed not only from the perspective of the domestic but also the international environment.
Common sense in economics tells us that in the case of narrow deflation, consumers feel that money is worth money, and saving is more beneficial than consumption, so they increase savings and reduce consumption; Businesses are expected to continue to invest less when their profits fall when their products or services are lower, and they are expected to continue to decline. As a result, consumption and investment are reduced at the same time, leading to a slowdown or even a recession in economic growth. In the case of asset deflation, the wealth effect of assets changes from positive to negative, and consumers' willingness and ability to consume in the face of shrinking wealth have been weakened, and they have to reduce consumption. In addition to machinery and equipment, many of the assets of enterprises are financial assets and real estate, and the shrinkage of these assets leads to the deterioration of the balance sheet of enterprises, thereby weakening the ability and willingness to invest, and also leading to weaker economic growth and even recession. You must know that after years of rapid economic growth and the issuance of a large number of currencies, many consumers and enterprises in China have accumulated a large amount of assets, and the main variable that determines their consumption or investment is not only the amount of flow income, but also the value of stock assets. In this way, from the perspective of the domestic environment, the impact of deflation on economic growth should not be underestimated.
Not only that, from the perspective of the international environment, the current global economic and financial environment makes the consequences of deflation in China more serious. What do you mean by that?
Since the global financial tsunami, the United States and other developed countries have adopted extremely accommodative monetary and fiscal policies, including zero interest rates and quantitative easing. It should be said that such a policy enabled the advanced economies, especially the United States, to emerge from the financial tsunami, while avoiding a sustained recession and achieving economic growth for more than a decade. Although in recent years, its negative consequences have been continuously emerging under the impact of factors such as the new crown epidemic, the conflict between Russia and Ukraine and the ** war, which have caused high inflation and forced policy authorities to take tightening actions such as raising interest rates and shrinking the balance sheet, but the extreme monetary easing for more than ten years has brought a very large amount of excess savings to the society, although these excess savings have begun to decrease with the US interest rate hike and balance sheet reduction, even if the interest rate is cut and the balance sheet is reduced to a normal level, the margin is still large. This means that most of the money that has been printed in large quantities over the past decade or so will not be recovered, so the situation of a large global liquidity surplus will not change for a long time to come. As for the final consequences, it can be said that sooner or later it will lead to a crisis, but it is unlikely to be in the short term, and it will be difficult to solve it at the moment, and even if it leads to a crisis, the United States may take a new form of re-easing with the help of the hegemony of the dollar. That is to say, for a long time to come, China will have to face an external environment in which the global dollar liquidity is significantly overabundant and the inflation level continues to be at a high level.
In the face of such an external environment, if China's economy continues to deflation, the negative consequences should not be underestimated. First of all, the gap between the profitability of Chinese enterprises and American enterprises will further widen, and China, which is already significantly backward, will further decline relative to the United States. Second, although China's real GDP growth will continue to be faster than that of the United States, the nominal GDP growth rate will be close to the United States' nominal GDP growth rate, so the pace of China's economic scale catching up with the United States has slowed down significantly, and China's rising trend in the global economic share has slowed down or even stopped, and the momentum of China's economic rise will be seriously hindered. Thirdly, the above two points will further weaken the market's expectations and confidence in the medium- and long-term development prospects of China's economy, and market expectations and confidence are the key to whether China's economy can fundamentally recover. Finally, it should also be recognized that inflation in the United States and deflation in China, the flood of the US dollar and the restriction of the renminbi not only affect the risk of China's enterprises going out to buy global assets, but more importantly, the risk of China's assets being purchased at low prices by foreign countries, so as to put the further opening up of China's market in an embarrassing situation: speeding up opening up will enable foreign funds to harvest China's assets at low prices, and slowing down the pace of market opening up is contrary to China's basic national policy of adhering to opening up to the outside world.
In view of the above, the negative impact of deflation on our economy must not be underestimated, especially at this stage. It is therefore necessary to take decisive action in macroeconomic policy to prevent the spread of deflation. First, we should adhere to the concept of putting development first, explore the applicability of various macroeconomic management models, including the Modern Monetary Theory (MMT) model, in China, and fundamentally eliminate the threat of deflation. Second, monetary and fiscal policy should be loosened more effectively, and the timing of monetary policy RRR and interest rate cuts should be as early as possible. Fiscal policy should be more vigorous in spending to promote the CPI to rebound as soon as possible; Third, the introduction of easing measures should be more concentrated and batch, so as to promote the measures to produce results faster, and more importantly, to improve the market's awareness of the certainty and determination to implement policy easing, so as to enhance market expectations and confidence. Fourth, the real estate market and the first market should be given special support, real estate regulation and control should be further and vigorously relaxed, and strive to stabilize real estate investment, sales and sales within this year; The stimulus policy should be carried out in the long term and in the short term, and a truly market-oriented issuance and trading mechanism should be established in the long term, and funds from all parties should be encouraged to enter the market in the short term, so as to promote the downturn