Breakingviews – China stagflation meme bodes ill for policymakers

HONG KONG (Reuters Breakingviews) – A viral economist note has struck a nerve in Beijing. Ren Zeping, a famous economist, published a report on Monday titled “Stagflation is coming”, which instantly blew up on Chinese social media. As the country’s legislature meets this week to plan economic strategy, such a reaction hints at a pending policy conundrum.

A former economist with the state cabinet’s research arm, Ren gained a following after he predicted China’s 2014-2015 stock market bull run, then hinted at the subsequent crash. His note has reminded some of 2010, when consumer inflation and GDP growth sharply diverged, producing general discontent.

It might seem odd for Chinese people to worry about so-called stagflation, a combination of slow growth and high prices that plagued the United States in the 1970s, at the present moment. The central government announced it will aim for GDP growth above 6% for 2021 on Friday, after skipping a target in 2020. Consumer inflation is non-existent, with non-food CPI contracting nearly 1% in January; Beijing aims for a 3% rise in 2021.

And yet official and private surveys showed manufacturing weakened in January and February, and services got battered too. At the same time global commodity prices have surged around 20% this year, Goldman Sachs estimates, which will eventually hit the world’s largest importer of crude oil, iron ore and copper. Worries about global inflation spurred by stimulus packages has already lifted the U.S. Treasury curve.

It’s all a potential headache for Guo Shuqing, party chief of the central bank, who’s been trying to reduce excessive leverage without upending a recovery. He’s surely aware of the changing national mood as popular euphoria over China’s early exit from recession and pandemic lockdowns wears off. In a speech this week he noted that interest rates would inevitably rise as Covid-related stimulus and subsidies fade; stock markets fell in reaction and the bank regulator had to clarify that Guo was not suggesting a formal hike.

Policy normalisation might reduce inflationary pressure, and a stronger currency could cushion rising imported energy costs. But that would risk derailing a revival that remains unbalanced and incomplete. On the other hand inflationary pressure, left unopposed, could feed into asset prices Guo is trying to deflate, including real estate in top-tier cities. Beijing’s shrewdest policymakers could find themselves in a real bind.