According to Michael Pettis, there’s a little trouble brewing in big China. Deflation is clearly rearing its ugly head in the Chinese economy, and Pettis says the only real cure for the problem is wealth redistribution…and that will require at least a few years to implement if/when the political will to do so is found.
Recent China CPI and PPI data
Consumer prices are hardly budging and producer prices are going down in China. This trend began a few months ago and has started to pick up steam over the last couple of months.
Pettis provides the most recent CPI and PPI numbers for China:
Consumer prices were up 2% in 2014 on an annual basis, significantly less the government’s 3.5% target, according to official data. This figure is notably below the 2.6% growth in consumer prices seen in 2013. Growth in the consumer price index was up slightly to 1.5% in December from the 1.4% rise in November. This is the slowest increase since November 2009. December’s CPI was up 0.3% against the previous month, reversing a negative trend seen since September.
Also of note, China’s producer price index (PPI), a measure of inflation at wholesale level, was down 3.3% year over year in December. China’s PPI fell 1.9% overall in 2014.
Chinese deflation will be different than Japanese experience
Pettis argues that the Chinese experience with deflation will be very different than Japan’s. He points out that Japanese deflation occurred in an environment of strong global growth. New information technology enabled systems were dramatically increasing productivity and international trade was expanding rapidly. A good bit of developing country debt was also written down, meaning debt levels around the world were relatively low and increasing. Commodity prices were also low, but reasonably stable.
Also of note, just a few years earlier, the central banks around the world (including the Fed) had been working to bring down high levels of inflation. Pettis highlights that disinflationary pressures were actually welcome at the time.
Global economic conditions are very different today. Non-food commodity prices are down in a big way, and are likely to drop even more. Moreover, as debt levels are extremely high almost everywhere, many countries will be madly deleveraging.
Pettis opines it will be another five years or so before the global economy “seriously engages in the process of restructuring sovereign debt with partial or substantial debt forgiveness.”
He also highlights the key problem that “…the two main sources of income inequality have not been resolved. First, within the household sector in the US, Europe, China, Japan and a number of other countries, the level of income inequality is nearly as bad as it has even been. Second, at the household level in countries like China and Germany the household share of income is far too low.”