This article points out that the prices in Chinese have been declining for nearly years, but Chinese central bank remained unmoved. The benchmark one-year lending rate remains lofty at 6%, and the writer think Chinese central bank is making a big mistake. However I can’t totally agree with that.
Firstly, I want to say the writer may not know china very well, because reducing the interest rate is nearly impossible in china. The most significant reason why China has a lofty high interest rate is the high demand in the real estate market. Chinese is zealous in buying houses, if the interest rate decrease, the demand of house will increase dramatically; therefore, cause the bubble in the real estate market. As I know, the global financial crisis in 2007 is the result of asset-price bubble in the U.S. housing market, so reduce the interest rate in china is a very dangerous thing.
Secondly, I believe that deflation is not entirely a bad thing in china. As the writer said, lower costs is the reason why the price on commodity decrease, it allowed companies to remain profitable even as their selling prices have fallen. So it will not hurt the companies. And for customers, lower price means their purchase power increase they can bur more goods. We might think people will defer payment or buy the good later, but the fate is the demand still increase in an accelerating rate. Yesterday is the “double 11 ” shopping carnival in China, the largest online shop renewed the world record of the time of breaking 100-million turnover.
The carnival started at 0:00 AM, but at 0:01 AM the turnover was exceeded 100 million yuan; at 0:03 AM, turnover exceeded one billion yuan. It took 38 minutes 28 seconds for turnover to reach 10 billion yuan ($1.6326 billion). Comparing with last year’s figure, it spent 5 hours and 49 minutes for turnover to reach 10 billion yuan.
This fully proves the demand was not decrease because of the deflation, instead the demand increase dramatically.
Overall, I don’t think a slightly deflation and high interest rate have a serious impact on China’s economy.
Source: http://www.economist.com/blogs/freeexchange/2014/11/chinas-economy