China’s Central Bank Governor Cautions about Deflation

Posted on Mar 31 2015 - 3:54am

Zhou XiaochuanZhou XiaochuanZhou Xiaochuan, China’s central bank governor, cautioned on Sunday that the country needs to be aware of deflation. After the governor’s statement, policymakers are closely watching receding commodity prices and a global economic slowdown.

Zhou’s statements are likely to add to worries about China’s potential slippage into deflation and accentuate growing wariness among policymakers as the country’s economy loses momentum despite stimulus efforts.

“Inflation in China is also declining. We need to have vigilance if this can go further to reach some sort of deflation or not,” Zhou stated during a high-level forum in Boa, Hainan. Zhou further stated that the speed of the slowing down of inflation was too fast, though part of this was caused by China’s current reforms and market readjustment programs.

Beijing is set to keep the world’s second biggest economy from following the same route of deflation and recession that has plagued Japan for the past two decades. The central bank’s newspaper has issued a warning that the country is close to falling into deflation.

The People’s Bank of China has reduced interest rates twice since November and has taken more steps to prop up growth, but economists warn that the bank will be forced to implement more aggressive programs in the next few months, if the economy and prices weaken.

No Liberalization Timetable

Zhou also stated that China had a ‘distinct direction’ for interest rate liberalization, a long-term solution, although he further stated that it was difficult to set a definite timetable for the decision. He referred to comments made the previous year when he stated that China’s deposit rates were anticipated to liberalize in a year or two.

Last week, Zhou stated China could subvert structural reforms if it changes to a loose monetary policy, while promising to ease capital controls to help turn the Yuan into a fully convertible currency. Zhou also stated on Sunday that the country hoped to streamline regulations regarding foreign exchange this year through the implementation of new rules.

Decreasing Commodity Prices

China is also vigilant about global economic slowdown, receding commodity prices, and falling inflation, Zhou stated. The price of oil has fallen by more than 50 percent since mid-2014, exasperating a wider commodity price rout which has forced inflation down in all of the major economies. The country is vulnerable as the world’s biggest net importer of iron ore and petroleum.

Earlier in the month, China stated an economic growth goal of approximately 7 percent for the year, down from the 7.4 percent growth in 2014.

But the weak data in 2015 reveal that the new target market may be at risk already, with slow domestic demand, a slowing property market, high debt, and industrial overcapacity pulling down activity.