Many here have said that China should keep the yuan low until its companies dominate NEV and semiconductor industries, and I think there's a lot of sense to that. This is a critical time for emerging industries.
Chinese Economics Thread
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Something I read well over a decade ago, when Merkel had that negative interest rate thing going.
The deflation lead to stagnation, and I stopped following it.
Not enough demand, aka spending, usually results in stagnation.
If prices collapse all the time, consumers typically refrain from making non-essential purchases, because the longer you wait the cheaper it will get. This is a well known reaction. This then causes production to collapse due to lack of demand. Which then leads to layoffs.
It's a stupid strategy if that's what they are really doing. Their issue is not cost. A 20% appreciation to CNY would not change China's competitiveness in "emerging" industries.
I don’t but the deflation is bad argument at all, it is just something we have always been told and accept without question.
Prices dropping is great for consumers, it allows them to buy more things.
Large productivity gains by AI automation is not deflation, the price of NEVs falling is not bad for the economy, it is good.
Lower prices and rising wages means more disposable income, and a better consumption economy, allowing people to buy more and also pay of debts.
If this results in lower GDP, it doesn’t matter, because people are better off because of it.
Prices dropping is great for consumers, it allows them to buy more things.
Large productivity gains by AI automation is not deflation, the price of NEVs falling is not bad for the economy, it is good.
Lower prices and rising wages means more disposable income, and a better consumption economy, allowing people to buy more and also pay of debts.
If this results in lower GDP, it doesn’t matter, because people are better off because of it.
Deflation is bad because it reduces the velocity of money, which results in less production.
What should be happening, is that prices should hold steady, and nominal and actual wages should increase. If productivity is going up but wages are not increasing, that's a sign that government intervention is required.
Deflation is usually caused by consumers not spending. If it causes consumers to buy more, then no problem - it'll self correct. But if it results in a liquidity trap where consumers buy even less because they think money will be worth more in the future, such as Japan during the lost decade, then it's bad news.
As usual, government intervention is required for when human psychology out plays itself. You need people to consume to have a functioning economy, otherwise businesses shut down, people are out of work, consumers panic even more, and a negative feedback loop forms, eventually collapsing the economy because no one is spending, no one is investing, and everyone is holding onto cash. This is a recipe for a return to poverty.
Contrary to popular perception created by Western media, allowing the free market to do whatever it wants isn't the most optimal way of running an economy, and will result in bigger bubbles and deeper, longer recessions.
The yuan being low is a function of low interest rates. China has been cutting interest rates to stimulate the economy; while the US has been doing the opposite to manage inflation. This makes the dollar more attractive because higher interest rates attracts more treasuries, bonds, etc. investment.
The trouble with the yuan being low is that one of the key strategies for managing deflation is to print more money. But printing more money causes currency weakness because you're diluting the value of what's in circulation. This makes it tough to do in an environment in which the yuan is already low, because China doesn't want to set off a currency panic where everyone's trying to dump the yuan in anticipation of it going 8:1 or 9:1 on the dollar.
Also, currency depreciation creates supply side inflation, which could also stifle consumption. A weaker currency means that all imports of components, raw materials, energy, etc. will become more expensive for Chinese producers. The result is higher prices to Chinese consumers (inflation); but if wages aren't rising to match, demand is suppressed, and the same recession risks mount, as with deflation.
In short, deflation weakens consumption, which weakens the economy. To fix deflation, you can print more money. But printing more money weakens the currency. Currency weakness leads to supply side inflation. Supply side inflation also weakens consumption, which weakens the economy. It's a lose lose situation.
This is why the ideal target is 2% inflation, not 2% deflation.
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Deflation is great on paper but very very bad when you look from the perspective of the firm and the economic planner. Deflation makes firms reduce price further, hence makes less profit. Less profit so less R&D and more layoff. Now consumers are also the employees of those companies that are affected by deflations. They are either jobless or earn less money, so they reduce spending, which lead to more deflation. And the cycle continues. Everyone is poorer. Consumers don't earn money from nowhere. They earn it only when their employers makes more profit. In this economy each consumers is also an employee. No employees would like to see their firms make less profit because that will reduce bonus for them.
The ideal inflation rate is agreed to be around 2%, but I think that it doesn't matter as long as there is inflation in the first place and the continuous price changes remain positive instead of negative over time, even if those price changes are minimal, it's not a big difference.
But if it turns negative, China has healthy interest rates of 3.5% and could just lower it a little bit to drive consumer demand and break the deflation again, or give some government stimulus with QE from the Central Bank.
Despite what delusional freaks blabber about in the West, China is still way less indebted and way healthier than the West even with recent developments, it can still afford way more debt without going overboard. It just recently started utilizing debt more freely after decades.
Regarding the fear that it will weaken the currency too much, I don't think so. If anything, the yuan should've been suppressed artificially for a long time. But due to the current process of internalization by the CB, after many decades, it will naturally appreciate over time finally.
And, if everything else fails, China has the most efficient governing system in the world with absolute power, authority, and capability, and could use tactics to increase consumption we probably never even thought of before, like the social credit system, or something entirely else.
To be honest, where have you ever heard of any country in history being worried about deflation while projected to grow 5% a year? Deflation is only bad when it causes a drop in productivity, other than that it just means that consumers are paying less for more stuff.
To further add, China would grow even more, in my opinion, around 7-8% this year, had the West, their main customers, not been in recession/stagnation. And it is still 5-6 times bigger growth than them, depending on the country, even if it is 5% GDP growth.
The current problems in the world economy are not caused by deflation in China, and similar bullshit, but by inflations, stagnations, and recessions in the West. China is the effect, not the cause of that process. That's what those bullshitters don't understand, the causality.
But if it turns negative, China has healthy interest rates of 3.5% and could just lower it a little bit to drive consumer demand and break the deflation again, or give some government stimulus with QE from the Central Bank.
Despite what delusional freaks blabber about in the West, China is still way less indebted and way healthier than the West even with recent developments, it can still afford way more debt without going overboard. It just recently started utilizing debt more freely after decades.
Regarding the fear that it will weaken the currency too much, I don't think so. If anything, the yuan should've been suppressed artificially for a long time. But due to the current process of internalization by the CB, after many decades, it will naturally appreciate over time finally.
And, if everything else fails, China has the most efficient governing system in the world with absolute power, authority, and capability, and could use tactics to increase consumption we probably never even thought of before, like the social credit system, or something entirely else.
To be honest, where have you ever heard of any country in history being worried about deflation while projected to grow 5% a year? Deflation is only bad when it causes a drop in productivity, other than that it just means that consumers are paying less for more stuff.
To further add, China would grow even more, in my opinion, around 7-8% this year, had the West, their main customers, not been in recession/stagnation. And it is still 5-6 times bigger growth than them, depending on the country, even if it is 5% GDP growth.
The current problems in the world economy are not caused by deflation in China, and similar bullshit, but by inflations, stagnations, and recessions in the West. China is the effect, not the cause of that process. That's what those bullshitters don't understand, the causality.
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