Deflation concerns, but China can overcome them
At a time of slowing economic growth and massive corporate debts, a deflationary spiral would be China's worst nightmare. And the risk is mounting.
In China's last protracted bout of deflation, from 1998 to 2002, persistent declines in prices were the result of monetary and fiscal tightening that began in 1993, compounded by the lack of exit mechanisms for failed enterprises. After peaking at 24 percent in 1994, inflation began to decline in 1995. But GDP growth soon began deteriorating rapidly. In an effort to revive growth in a difficult global environment and buffer exports against the impact of the Asian financial crisis, the Chinese government loosened monetary and fiscal policy beginning in November 1997.
But it was too little too late. By 1998, when consumer price index inflation began to fall, producer prices had already been declining for eight months, and remained negative for a total of 51 months, with CPI growth beginning to recover after 39 months.