Warnings of 'Stagflation' Emerge Within China

People's Bank Monetary Policy Committee Member: "Q4 Growth Rate Likely Below 4%... Risk of 'Quasi-Stagflation'"
Paradoxically, Yuan Hits Highest Level in 6 Years... Authorities Crack Down on Speculative Yuan Trading to Prevent Economic Downturn

[Asia Economy Reporter Park Byung-hee] Voices within China pointing out the economic crisis are growing louder.

Bloomberg reported on the 21st (local time) that Liu Sujin, a monetary policy committee member of the People's Bank of China, the central bank, warned of the risk of quasi-stagflation in the Chinese economy.

At the China Macroeconomic Forum held online that day, Liu mentioned the excessively high Producer Price Index (PPI) growth rate and the relatively slowing economic growth rate in China, referring to the risk of stagflation.

China's October PPI rose 13.5% year-on-year, marking the highest level since 1996. China's economic growth rate slowed from 18.3% in the first quarter of this year to 7.9% in the second quarter and 4.9% in the third quarter.

Liu said, "The economic growth rate has noticeably slowed since last September," and predicted, "There is a very high possibility that the fourth-quarter economic growth rate will fall below 4%."

He added, "If demand remains sluggish and producer prices stay high, corporate profits will decrease, and the risks embedded in the current Chinese economy could rapidly surface." Liu also stated, "Once a crisis emerges, it will likely persist until next year."

Chinese Premier Li Keqiang also stated on the 19th that new factors causing economic slowdown are emerging, and the government is facing many difficulties in maintaining economic stability. Premier Li emphasized the need for ‘cross-cyclical’ adjustment to support the growth rate. Cross-cyclical adjustment is a slogan representing the new economic policy stance recently promoted by the Chinese government. It means taking swift measures to overcome the crisis while reducing the scale of government support and managing economic policy from a long-term perspective.

Liu mentioned structural issues such as local government debt and the rapid expansion of certain real estate companies, stating that these problems need to be resolved in the long term. He also emphasized that the government should aim for a soft landing while minimizing negative impacts. This is interpreted as an indirect emphasis on the importance of the government’s cross-cyclical adjustment policy.

Although internal voices pointing out the Chinese economic crisis continue, paradoxically, the Chinese yuan has reached its highest value in six years. This is because global demand has recovered as the world economy moves out of the COVID-19 phase this year, leading to a strong export market in China. The dollar-yuan exchange rate has fallen from around 6.5 yuan per dollar at the beginning of the year to about 6.3 yuan per dollar currently.

The China Foreign Exchange Trade System (CFETS) announced last week that the ‘CFETS Yuan Exchange Rate Index’ recorded 101.82, the highest since December 2015. The yuan exchange rate index reflects the relative value of the yuan against 13 major currencies and is compiled and released weekly by CFETS.

Inside China, there are voices that the authorities are uncomfortable with the rising value of the yuan. A strong yuan could weaken export demand and act as a negative factor for the Chinese economy. The authorities have begun cracking down on speculative yuan trading.

According to officials, the China Foreign Exchange Committee (CFEC), following guidelines from the People's Bank of China, recently instructed commercial banks to reduce the proportion of risky investments in proprietary trading. Accordingly, if proprietary trading increases by more than 50% on a quarterly basis, banks must reduce speculative trading through internal review processes. Officials explained that this measure targets speculative foreign exchange trading conducted through proprietary trading.

This content was produced with the assistance of AI translation services.