The word has finally come down from inside the ever-so-restrained People’s Bank of China, as one member of the bank’s monetary policy team told Reuters that there would be no major intervention taken to pump more cash into the slowing Chinese economy unless inflation dips below 1%.
In January China’s headline consumer price inflation hit 0.8%, then it bounced back up to 1.4% in February.
Board member and economics professor Qian Yingyi told Reuters that policy makers would be watching inflation figures in March and April to see if deflation was worsening.
“If it’s stable between 1 and 2 per cent, it’s very, very comfortable. But above 2 per cent, there is a little bit of worry about inflation. Below 1 (per cent), there will be bit of a worry about deflation,” he said.
But until then, all the Wall Street analysts warning of the deadly combination of debt and deflation, everyone calling for intervention with every bad data point — they can stop wasting their breath.
Wall Street has been talking about this issue in earnest since last fall. Its argument is pretty basic. The Chinese economy is slowing as it transitions from one based on investments to one based on consumption. Until consumers have enough purchasing power, China’s corporations make less money.
At the same time, Chinese corporations have a ton of debt. They need revenue to make payments on that debt — to the already debt loaded Chinese banking system — and keep operations going.
Last fall, Societe Generale analyst Wei Yao argued that this problem went even beyond debt restructuring and government easing measures.
“China’s debt problem lies with the corporate sector, and so PPI deflation can cause more damage to debt dynamics than CPI deflation. The cure should be capacity consolidation and debt restructuring, rather than
another stimulus package targeted to boost investment demand,” she wrote.
So as deflationary pressures have continued analysts have kept wondering when the PBOC will step in and do something. It’s in note after note.
“Widening PPI deflation and soft CPI inflation, especially after adjusting for seasonal effects, point to persistent deflation risks,” wrote Barclays after February’s number came out. “In our view, the monetary policy needs to be more “proactive” in order to deal with the cyclical challenges in the near term.”
Of course, this is especially disconcerting because economists and analysts see deflationary pressure not just in China, but around the world.
So the PBOC finally responded.
And their response was: ‘Guys, we got this… until we don’t.’