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China will avoid deflation, central bank official says

A senior Chinese central bank official has said the world’s second-largest economy will avoid slipping into deflation this year and urged patience as it struggles to recover from strict Covid controls last year.

The comments from Liu Guoqiang, deputy governor of the People’s Bank of China, come after official data released this week showed that consumer prices were flat in June against a year earlier and exports fell sharply during the month.

The consumer prices index would remain weak in July before rebounding in August and moving closer to 1 per cent by the end of the year, Liu said.

China’s economy “[is] not in deflation and won’t show signs of deflation in the second half of this year”, Liu told reporters in Beijing.

The official data this week showed consumer prices declining month on month, as demand remained weak following three years of strict Covid controls. Meanwhile rising interest rates in developed companies hit demand for Chinese goods, with exports in June suffering their biggest year-on-year drop since the start of Covid-19 pandemic. 

Analysts will be watching the release of China’s second-quarter gross domestic product figures on Monday for clues about the underlying health of the recovery and whether Beijing will need to step up stimulus measures to hit its full-year gross domestic product target of 5 per cent.

Liu, however, said the economic recovery remained on track. Financial indicators, including a measure of money supply and household incomes, were signalling that the foundation was being laid for a long-term recovery, he said. 

“The current economic turbulence is a normal phenomenon of post-pandemic recovery,” he said. “It takes about a year for many countries to recover from the coronavirus pandemic. We’re only six months on since China transitioned from the mode of pandemic prevention and control.”

Liu said the central bank had ample policy room to deal with unexpected challenges and, if needed, could ease monetary policy using tools such as cuts in the reserve requirement ratio — the amount of cash that banks have to set aside against their deposit liabilities.

China’s property sector, in particular, has been weighing on sentiment after a collapse in demand from buyers. The government this week announced it would extend support measures for real estate into next year.

On China’s foreign exchange rate, which has traded near seven-month lows against the dollar this year, Liu warned against any speculation. The currency has rebounded strongly since last week on a weaker US dollar and continued to gain on Friday.

“Speculative bets produce no benefits and can only hurt oneself and others,” Liu said. He said expectations on the renminbi exchange rate had now stabilised.

When asked whether the PBoC has rolled out any measures so far to stem renminbi weakness, Liu said: “The central bank has an ample toolbox to deal with market deviations — we will use it when needed.”

With additional reporting by Joe Leahy in Beijing


Source: Economy - ft.com

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