With high debt levels and falling consumer and producer prices, China faces the prospect of a vicious cycle whereby lower demand leads to lower investment, lower output, lower income, and thus even lower demand. To avoid Japanification, policymakers must pursue aggressive aggregate-demand stimulus, starting immediately.
NEW YORK – The Chinese economy is underperforming relative to its growth potential. Not only are investment and consumption demand weaker than hoped, but the country is facing the challenge of two Ds: deflation and debt. While consumer-price inflation is close to negative territory, producer-price inflation has already been negative for a year. At the same time, the private and public sectors have accumulated massive debts, owing to higher spending during the pandemic and the broader response to the easy-money conditions of previous years.
NEW YORK – The Chinese economy is underperforming relative to its growth potential. Not only are investment and consumption demand weaker than hoped, but the country is facing the challenge of two Ds: deflation and debt. While consumer-price inflation is close to negative territory, producer-price inflation has already been negative for a year. At the same time, the private and public sectors have accumulated massive debts, owing to higher spending during the pandemic and the broader response to the easy-money conditions of previous years.