China may have to get its economy up and running soon as stagflation risk increases

Liu Shijin, a member of the monetary policy committee of the People’s Bank of China, said in an online forum on Sunday that the world’s second-largest economy may have to deal with “near stagflation” for the rest of this year and into 2022, if demand continues to struggle and the cost of goods coming out of Chinese factories remains high.

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

Stagflation, when inflation is high but economic growth slows, can be problematic as policies aimed at curbing inflation, as higher interest rates, they run the risk of stifling growth further. Meanwhile, policies aimed at boosting growth run the risk of pushing prices higher.

Even with his warning, Liu still expects the economy to hit China’s growth target of more than 6% for the year.
China's economy is being hit by crises in energy, transportation and real estate

The risks to the Chinese economy have been mounting in recent months. Along with rising producer price inflation at the global factory, the country is also grappling with a severe energy crisis and a major slowdown in the real estate sector.

Chinese Premier Li Keqiang recently acknowledged those concerns, telling a seminar in Beijing last week that the economy faced “further downward pressure.” He highlighted recent Covid-19 outbreaks, severe flooding, rising commodity prices, and energy shortages as key concerns.

Li also said that lawmakers should focus on helping “market players,” including manufacturing companies and small businesses, by offering tax cuts or administrative fee reductions.

“Concern about slowing growth is clearly increasing among technocrats in different government agencies,” Larry Hu, China’s chief economist at Macquarie Group, wrote in a report Sunday.

China & # 39;  s & # 39;  unprecedented & # 39;  The repression surprised private companies.  A year later, you may have to cut back on business a bit

Analysts also suspect that China’s policy makers could consider cutting interest rates or taking other steps to ease monetary policy. A quarterly report released Friday by the central bank omitted phrases that had previously appeared to indicate stricter policies.

The removal of those phrases suggests a shift on the horizon, according to analysts at Goldman Sachs, Nomura and Citi.

“In our opinion, these eliminations represent an official change in the policy stance of the People’s Bank of China and lay the foundation for a more decisive monetary and credit easing,” Nomura analysts wrote in a report on Sunday.

Those changes are not yet happening. On Monday, the central bank kept the loan prime rate, a benchmark rate that banks charge corporate clients for new loans, unchanged for November, the 19th consecutive month.

But analysts at Capital Economics believe it won’t be long before the central bank starts cutting official rates.

“As economic tensions continue to grow, there will be more pressure to ease financial stress on indebted borrowers,” Julian Evans-Pritchard, senior China economist at the firm, wrote in a report Monday. He added that Capital Economists believes the central bank will start lowering rates before the end of 2021, “followed by further cuts in 2022.”

Others hope the central bank will explore other options. Rather than change interest rates, Goldman Sachs analysts said they expected more targeted support for green development and small or medium-sized businesses.

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