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Can China Avoid Deflation?

In his speech at the 2015 World Economic Forum meeting in Davos, Chinese Premier Li Keqiang acknowledged that China’s economy is facing strong headwinds. Can Chinese leaders make good on Li's pledge to stabilize growth?

BERLIN – In his speech at the 2015 World Economic Forum meeting in Davos, Chinese Premier Li Keqiang acknowledged that China’s economy is facing strong headwinds. Annual GDP growth in 2014 was 7.4%, the lowest rate since 1990. But, to stabilize economic growth, he pledged that China will “continue to pursue a proactive fiscal policy and a prudent monetary policy.”

China’s current economic slowdown was policy-induced. During the last two years, the government has tightened fiscal and monetary policy, in the hope of offsetting the adverse effects of the large stimulus package implemented in response to the 2008 global financial crisis. Li’s Davos speech was intended to signal that the Chinese government will not allow the growth rate to slip further.

China’s stimulus package was by far the world’s largest and most effectively implemented. It stabilized growth in China and moderated the global economic contraction. But it left in its wake some serious problems for the Chinese economy.

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