Deflation is a genuine risk in Asia — and China is leading the way according to a new paper published by the Hong Kong Institute for Monetary Research. Overall. China’s producer prices are down a cumulative 12.7% since their peak in 2011 – that extends a stretch of negative producer price readings to 52 months.
The paper finds three big issues in China that could make the problem worse — declining corporate profit, overcapacity, and a heavy debt burden. China needs to make some changes and decisions in order to ensure the deflation problem doesn’t get worse and spread through the region.
The authors suggest some near-term fixes on the supply-side, including additional reforms to state-owned enterprises and incentives for the private sector to invest, particularly in research and development that could give the economy a leg up on the technology ladder. Without key reforms, however, China could face a hard landing and take other Asian economies with it.
Read the full paper here.