Chan Xiangyang is the secretary general of the China Urban Finance Society and says the risk of deflation is higher than most observers realize. His comments appeared in Finance News, the newspaper published by the People's Bank of China.
The secretary general mentions several reasons why deflation is a threat. Read this excerpt from a February 25 Reuters article:
Chan said the deteriorating macroeconomic environment, combined with enduring industrial overcapacity, widespread speculative and inefficient investment, and slowing foreign capital inflows are all weighing heavily on prices.
That risks setting off a debilitating deflationary cycle in the world's second-largest economy, similar to the "lost decades" experienced by Japan under similar - but not identical - circumstances that began in the 1990s, in which inexorable price declines discouraged investment.
Chinese policymakers and market participants have been trying to determine to what extent China's weak prices are driven by purely domestic factors, including demand from Chinese consumers and industrial overcapacity, as opposed to a globally weak price environment.
The falling price of oil, for example, which is down by over 50 percent since mid 2014, has aggravated a broader commodity price rout which has pushed down inflation in all the major industrial economies.
As the world's largest net petroleum and iron ore importer, China's industrial good prices closely track global commodities prices.
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