Xi Jinping may have to let yuan slide to avoid spiral of debt and deflation, economist says: 'a price worth paying'
The Chinese economy risks being caught in a debt-deflation cycle. To avoid this, the yuan might need to be devalued, according to economist Shang-Jin Wei, Business Insider reported.
The former chief economist of the Asian Development Bank has seen falling consumer prices and producer deflation for a year. Both the public and private sectors have also accumulated substantial debt due to pandemic-related spending and easy money policies.
Wei described the twin threats of debt and deflation as a "toxic combination." He warned that this could trigger a vicious circle of falling demand, investment, production and income.
Despite Xi Jinping's efforts to revive the economy, the People's Bank of China (PBOC) has yet to introduce substantial liquidity. Wei suggested that the People's Bank of China could consider a quantitative easing strategy similar to the bond-buying spree launched by the Federal Reserve and other monetary authorities after the financial crash of 2008.
See also: Rallies in China, Declines in Europe: U.S. Market Outlook for Shortened Labor Day Week
However, Wei acknowledged that aggressive quantitative easing could further weaken the yuan, which has already depreciated by around 5% against the US dollar over the past year. .
"But if the price to pay to save the economy from stubborn deflation is a weaker renminbi, it is a price worth paying - and may even serve as a useful adjustment mechanism by stimulating foreign demand for Chinese products. ", said Wei.
He suggested that rather than trying to manage the exchange rate, Chinese authorities should leave these adjustments to market forces.
Read more: It used to take a fortune to own premium bottles, but now $25 is enough to get you launch into this $229.4 billion asset class. .
Photo by Eric Prouzet on Unsplash
Designed by Benzinga Neuro, edited by Pooja Rajkumari
The GPT-4 Benzinga Neuro content generation system leverages the vast Benzinga ecosystem, including native data, APIs and more, to create complete and current stories for you . Learn more.
© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
The Chinese economy risks being caught in a debt-deflation cycle. To avoid this, the yuan might need to be devalued, according to economist Shang-Jin Wei, Business Insider reported.
The former chief economist of the Asian Development Bank has seen falling consumer prices and producer deflation for a year. Both the public and private sectors have also accumulated substantial debt due to pandemic-related spending and easy money policies.
Wei described the twin threats of debt and deflation as a "toxic combination." He warned that this could trigger a vicious circle of falling demand, investment, production and income.
Despite Xi Jinping's efforts to revive the economy, the People's Bank of China (PBOC) has yet to introduce substantial liquidity. Wei suggested that the People's Bank of China could consider a quantitative easing strategy similar to the bond-buying spree launched by the Federal Reserve and other monetary authorities after the financial crash of 2008.
See also: Rallies in China, Declines in Europe: U.S. Market Outlook for Shortened Labor Day Week
However, Wei acknowledged that aggressive quantitative easing could further weaken the yuan, which has already depreciated by around 5% against the US dollar over the past year. .
"But if the price to pay to save the economy from stubborn deflation is a weaker renminbi, it is a price worth paying - and may even serve as a useful adjustment mechanism by stimulating foreign demand for Chinese products. ", said Wei.
He suggested that rather than trying to manage the exchange rate, Chinese authorities should leave these adjustments to market forces.
Read more: It used to take a fortune to own premium bottles, but now $25 is enough to get you launch into this $229.4 billion asset class. .
Photo by Eric Prouzet on Unsplash
Designed by Benzinga Neuro, edited by Pooja Rajkumari
The GPT-4 Benzinga Neuro content generation system leverages the vast Benzinga ecosystem, including native data, APIs and more, to create complete and current stories for you . Learn more.
© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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