Beijing’s deleveraging effort from the past two years is now under attack from a familiar foe: deflationary pressure, which is reducing China’s nominal GDP growth and making it more difficult to manage China’s significant debt burden. With January PPI growth declining to only 0.1%, deflation risks will generate more attention throughout 2019. In assessing deflation risks this year, we argue:
Producer price growth will remain in positive territory in the first half of 2019 but may decline below zero in 2H, with crude prices a key risk. Consumer prices are unlikely to fall below zero, because of rising pork prices.
Deflation risks will reinforce the monetary policy bias toward continued easing and expansion of the central bank’s balance sheet. Easing steps are likely to continue despite strong credit growth in January, with additional interest rate cuts to reduce banks’ funding costs more likely to take precedence over more liquidity injections.
Nominal GDP growth will slow and is already below credit growth rates. It will be difficult to grow out of China’s debt problem in the long term.
