China’s Central Bank Warns Of Deflation
The People’s Bank of China echoed what many in the market have been saying for months now: the risk of deflation in the No. 2 economy is now very real.
Speaking at the Boao Forum in Hainan, China this weekend, central bank governor Zhou Xiaochuan said inflation is declining “too quickly.” And that the PBoC needs to watch for signs of deflation due to declining commodity prices.
“We need to have vigilance if this can go further to reach some sort of deflation or not,” Zhou reportedly said.
Declining commodity prices aren’t China’s only problem. In fact, that’s the least of China’s problems given the fact that China is a major commodity importer. Cheaper commodities means China is getting oil and soybeans at a lower price than it was a year ago.
Chinese policy makers are faced with two major headwinds: its shift to a more open and consumer driven economy, coupled with changes in its most important markets, the U.S. and Europe. The last thing China wants is to be faced with price erosion at a time when its companies are still reeling for massive oversupply with no one to buy its widgets in Europe, or at home.
To keep the economy from falling below its 7% growth target this year, the PBoC has cut interest rates twice since November. Some economists believe the bank will ease further, or China will grow less than 7% this year. China grew 7.4% in 2014, its slowest pace in 24 years.
Source: Forbes – China’s Central Bank Warns Of Deflation
