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China's coronavirus-battered economy is at risk of sinking into deflation, one of HSBC's top economists warns

May 12, 2020, 21:25 IST
Business Insider
A man walks by electronic display panels advertising a video footage of Chinese President Xi Jinping speaking at the World Economy Forum on a street in Beijing, Monday, June 25, 2018.AP Photo/Andy Wong
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One of HSBC's most senior economists thinks the country is at risk of falling into deflation amid the unprecedented economic slowdown caused by the coronavirus.

HSBC chief China economist Qu Hongbin told Bloomberg TV in a phone interview Tuesday: "The bigger risk in China is not inflation, but instead deflation is the bigger risk."

Hongbin added: "CPI is above 3% but it is trending lower which means there is more room to step up that easing going forward."

Chinese inflation has dropped rapidly in recent months, falling from a five-year high of 5.4% in January to 3.3% now. That drop, Hongbin said, suggests that deflation is now a risk.

Deflation, which occurs when prices for everyday goods and services fall over time rather than increasing, is generally seen as an negative economic negative as it increases the value of debt and weakens consumer spending power.

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Hongbin also said there was room for more stimulus in China to deal with the fallout from the virus, which originated in the city of Wuhan.

Asked what policy measures he expects in the upcoming China People National Congress next week, he said: "Things I am watching for is even without a numerical GDP growth target, what is the tone of the policy goals, in terms of the growth and the employment jobs, that will give a sense of how much catch up in terms of the stimulus the government of China will do in the months ahead."

There has been speculation that the Chinese ruling party will adjust or even completely remove the formal GDP growth targets it normally sets for the country of around 6% annually.

Journalists observe during the opening ceremony of the National People's Congress in China.Getty Images/ChinaFotoPress

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China has rescheduled its most important political event for May 22, suggesting the government is ready to restore normal order.

The annual session of the National People's Congress (NPC), China's parliament, was due to sit on March 5 but was canceled on February 24 due to the coronavirus outbreak.

"Whether they are going to have a much lower but more realistic range of the GDP growth like 2-3% or they simply drop the number completely off. That will make a difference in terms of the magnitude of the stimulus being put forward," Hongbin added.

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The second thing he is looking out for is whether any more stimulus will be announced.

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Hongbin said: "Particularly on the political policy front, there are already talks about the special treasury bond when they are going to issue that and what is the magnitude."

China's economy contracted in the first quarter of 2020, the first contraction since 1992 as the coronavirus pandemic has battered consumer spending.

The National Bureau of Statistics reported that GDP fell by 6.8% during the first quarter.

Early data from the second quarter shows that while China's economy has not fully recovered from the fall seen in Q1, it is on it's way back.

A Caixin composite PMI of the Chinese economy showed a reading of 47.6 in April, below the 50 breakeven point, but up from 46.7 in March.

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