Contrarian academics in China believe their country faces a ‘stagflation’ risk as problems in the property market, the economy and some of the country’s large state-owned banks accelerate
China may have to juice its economy soon as ‘stagflation’ risk rises
China is facing the risk of “stagflation” after surging asset prices became a headache for the country’s “indifferent” leaders as they sought to maintain economic growth, according to a report.
Disconcerting signs in the property market, troubled banks and the slowing Chinese economy added to the weakening trend, the state-backed Institute of Economic Research of the Chinese Academy of Social Sciences (CASS) said.
The report said the risk of a “policy crisis” was rising as a result of economic policy mismanagement and mounting problems for government-owned banks.
The chances of China transitioning to a market-oriented economy seemed “remote”, it added.
Stagflation was a widespread term used to describe prolonged periods of economic growth, inflation and unemployment. But in recent years, economists have coined the term “stagflation-plus” to describe rising unemployment, weakening economies and stagnant earnings as commodity prices fall, fuelling the double whammy of negative interest rates, government intervention and declining asset prices.
CASS said the last time the Chinese Communist party faced such a dilemma was between 2008 and 2013.
“The current uncertain financial environment, a lack of enthusiasm among policymakers to reduce fiscal and monetary stimulus measures, coupled with high asset prices and corruption concerns – all point to a shrinking window of opportunity for an immediate transition to a market-oriented economy,” it said.
Read more: Extreme tightening by US Fed exposes China’s risk of stagflation
The CASS report said that, of late, problems in the real estate market had attracted government attention. Government cadres wanted to banish the spectre of crashing prices by formally backing the sector with budget-bound credit lines and special tax breaks.
They were also pushing bank bosses to establish joint ventures with real estate developers in the face of soaring private property prices.
Chinese bad debts are high but the banks were pumping money into new projects
Fiscal disinclination was also bearing down on the property market and economic growth, it said.
“Historically, government support for the real estate sector was enough to prevent or counteract many monetary errors in the past,” it added.
CASS said Chinese bad debts were high but the banks were pumping money into new projects rather than slowing down activities or engaging in deep cleaning up of bad debts.
The struggling share market, coupled with the volatility in the other major asset class – property – has seen investors rush to repurchase bonds from bad debts to benefit from a pick-up in market activity and bonds market liquidity.
“Debt was the need of the hour as investors looked for safety in bond repurchases,” the report said.
Chinese “search for safety” in the bond market
(The illustrations in this article were created using Google Streetview images.)
Contrarian academics at the CASS said they believed there was a risk of “stagflation” in China and that current policies did not have much room for manoeuvre.
“Structural reform is discussed many times, but actual reforms are still quite difficult and have quite a low likelihood,” the report said.
While investors had sunk their money into “risky” assets such as stocks and commodities, some of the projects listed as the “success stories” had “no chance” of functioning after repeated delays, it added.
Government inflation targets, shrinking arable land, shrinking arable land reserve resources and spreading bird flu in affected regions had hurt the rural economy.
Although farm stocks had stabilized, the resulting land has only increased prices of food which had sharply reduced disposable income, said the report.
“The general situation is one of very weak investment demand, faltering production efficiency, weak demand power for farm real estate investment, worsening fixed asset investment, rising indebtedness and increasing food inflation pressures,” the CASS said.
It added that farmers were not prepared to make any major changes as a result of recent downturns.