Almost everywhere you look, central banks are attempting to battle high inflation. Inflation peaked at 9% in the United States last year, the highest level in over four decades, prompting the Federal Reserve to begin an aggressive cycle of rate hikes. In Britain, inflation remains at over 10% and has increased in recent months, despite the Bank of England raising rates to try and bring prices under control. The Eurozone has had more success in taming inflation – which has now dropped to 6.9% – but prices are still elevated. There is one major exception: China.
In February, China’s annual consumer inflation slowed to the lowest rate in a year. The January 2023 readings show that inflation is currently standing at around 2.1% – pretty much bang on the Fed and Bank of England’s targets. Why is Beijing not facing the same kind of problems that almost every other major financial power – from Washington to London to Singapore to Frankfurt – is grappling with?
Tighter Monetary Policy
Officials in Beijing often like to point to the tighter monetary policies they pursued during the coronavirus pandemic as a key reason for their low rates of inflation. This contrasts with the approach of most Western economies, which initiated huge quantitative easing (QE) and stimulus programmes in a bid to prop up their economies during the various lockdowns. The Bank of England alone bought more than £745 billion worth of government bonds. The printing of trillions of dollars of cheap money during the pandemic has undoubtedly contributed massively to inflationary pressures in the West. Put simply, QE helps to push up inflation by keeping interest rates artificially low, therefore encouraging consumers to spend more, putting upward pressure on prices.
China, despite its three-year long zero-Covid policy, took a different approach. While the People’s Bank of China (PBOC) injected trillions of renminbi into the banking system, to ensure sufficient levels of liquidity were maintained, the central bank was keen to refrain from excessive loosening – at the same time as the Fed’s balance sheet more than doubled. China did offer some stimulus packages to help its beleaguered economy, such as the $44 billion package of credit support in August last year, but didn’t go as far as other Western economies. Less cheap money injected into the system means lower inflation.
One of the major drivers of inflation in the West has been energy prices. Britain’s Office for National Statistics (ONS) pointed out that in 2022, electricity prices in the UK rose by 66.7% and gas prices by 129.4%. These were therefore “some of the main drivers of the annual inflation rate.” Prices rose largely because of the volatility in energy markets after Putin’s invasion of Ukraine, and because Europe and the United States started to sanction Russian energy. OPEC has also voted consistently to keep supplies of oil limited and therefore keep prices higher.
Although every country is inevitably affected by the volatility on global markets, and the higher prices that have resulted, China has managed to avoid the worst of it. Beijing, which has maintained close relations with Moscow, has secured access to cheaper energy from Russia – which is happy to sell at a discounted given the commodity is sanctioned elsewhere. China has also bought plenty of cheap oil from Iran, which has also been sanctioned by the US and other Western countries. Although it does seem that electricity prices have risen to an extent, Chinese consumers and businesses appear to have been shielded from the worst consequences of higher oil and gas prices.
There’s also the fact that, for many commodities, China is largely self-sufficient. Inflation has been aggravated in Great Britain, for example, because the country is running a historically large trade deficit at the same time as the pound sterling is trading ever-more feebly. A weaker currency pushes up inflation further by making imports relatively more expensive.
China is largely immune from these conditions, despite experiencing a weaker yuan over the last year or so. After all, China produces many of its commodities within its own borders and is therefore less exposed to international market volatility. Even when it does have to import commodities, such as coal, the country’s status as the world’s primary manufacturing hub means it can effectively pass on any additional costs to foreign buyers.
Of course, there’s the possibility that this could change as China’s post-Covid reopening continues. Inflation has been limited by the fact the domestic demand has remained low – as spending patterns gradually return to pre-pandemic levels, that could change.
However, it’s more likely that deflation will be the biggest risk for China throughout 2023 and beyond. With inflation low anyway, the collapsing property sector is further weighing on demand. This could be just as bad a problem – if not worse – than inflation. “Deflation is worse than inflation in China for sure because it drives up the cost of borrowing for both consumers and corporates.” China is not facing the same inflationary pressures as their counterparts in the West, but must be careful this blessing doesn’t turn into the curs of deflation.
Author: Harry Clynch
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