From Nikkei Asia, July 12:
Japan offers lessons on importance of not delaying intervention
Wei Yao is chief Asia-Pacific economist at Societe Generale in Hong Kong. Michelle Lam is greater China economist at the bank.
China is at growing risk of slipping into deflation. To escape a scenario of severe deflation like Japan experienced in the 1990s will require a dramatic reset of the policy mindset in Beijing.
If we are right about China slipping into a deleveraging and deflation phase, the optimal policy probably would be to speed up debt restructuring and provide direct income or consumption support to households.
China's reopening recovery has been disappointing to date. Following a decent rebound in the first quarter of 2023, activity indicators slowed sharply across the board except for the service sector, highlighting the weakness of domestic demand.
Worse, there are growing signs that the property sector may be at risk of a double-dip recession. Meanwhile, inflationary pressure has been lackluster lately, with the consumer price index flat in June with a year earlier and the producer price index down 5.4%.
The key reasons for the soft recovery are twofold.First, Chinese companies and households are still suffering from the scarring of the pandemic, which lasted for a lengthy three years.
The service sector is dominated by small, midsized and individual businesses whose revenue was crushed. They have remained cautious about hiring and expansion since the removal of zero-COVID restrictions.
As for households, without the major direct income support provided in Western economies, they remain cautious about spending and are accumulating precautionary savings. Retail sales are still running more than 10% below the trend level pre-COVID while the household savings rate is still 3 percentage points above 2019 levels.
More importantly, structural adjustments in the property sector are damaging confidence and prompting households to deleverage. Under the government's campaign to curb speculation, home prices corrected last year by the most since 2015.
With the introduction of a property tax on the horizon, the long-held belief among households that home prices will just keep on rising appears to have vanished. Some have started to make mortgage prepayments or sell apartments previously purchased for investment....
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