As the risk of “stagflation” rises, the People’s Bank of China may have to inject vitality into the Chinese economy

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Liu Shijin, a member of the Monetary Policy Committee of the People’s Bank of China, said on an online forum on Sunday that if demand continues to grow, the world’s second largest economy may have to deal with “quasi-stagflation” for the rest of this year and 2022. Struggling, the cost of goods leaving the Chinese factory remains high.

“We need to pay attention, because if this happens, it will not only affect the fourth quarter, but also next year,” Liu said.

Stagflation-when the rate of inflation is high but economic growth slows-can be problematic because of policies aimed at curbing inflation, For example, higher interest rates further curb the risks of growth. At the same time, policies aimed at promoting growth run the risk of causing prices to continue to rise.

Even with his warning, Liu still predicts that the economy will reach China’s growth target of over 6% this year.
China's economy is being hit by the energy, shipping and real estate crises

In recent months, the risks facing China’s economy have continued to increase. As global factory producer price inflation soars, the country is also struggling to cope with a severe energy crunch and a sharp slowdown in real estate.

Chinese Premier Li Keqiang recently acknowledged these concerns and said at a seminar in Beijing last week that the economy is facing “new downward pressure.” He pointed to the recent Covid-19 outbreak, severe flooding, rising commodity prices and energy shortages as the main problems.

Li also said that policy makers should focus on helping “market participants” including manufacturing companies and small businesses through tax cuts or administrative fee reductions.

Larry Hu, the head of China’s economics at Macquarie Group, wrote in a report on Sunday: “The apprehension of slower growth among technocrats in different government agencies is clearly on the rise.”

China's unprecedented suppression stunned private enterprises.One year has passed, it may have to cut some business

Analysts also suspect that Chinese policymakers may consider cutting interest rates or adopting other measures to ease monetary policy. The central bank’s quarterly report released on Friday omitted words that previously seemed to indicate policy tightening.

Analysts at Goldman Sachs, Nomura Securities and Citibank said that the deletion of these phrases indicates that a change is about to occur.

Nomura analysts wrote in a report on Sunday: “In our view, these deletions represent a formal change in the policy stance of the People’s Bank of China and laid the foundation for more decisive monetary and credit easing.”

These changes have not yet occurred. On Monday, the central bank maintained the November loan best interest rate (the benchmark interest rate at which banks charge new loans to corporate customers) unchanged for the 19th consecutive month.

However, Capital Economics analysts believe that the central bank will soon begin to reduce policy interest rates.

The company’s senior China economist Julian Evans-Pritchard wrote in a report on Monday: “As economic pressure continues to increase, ease the pressure on debt borrowers to raise funds. It will get bigger and bigger.” He added that capital economists believe that the central bank will start to cut interest rates before the end of 2021, “and then further cut interest rates in 2022”.

Others want the central bank to explore other options. Goldman Sachs analysts said that instead of changing interest rates, they expect to provide more targeted support for green development and small and medium enterprises.

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