Mint Quick Edit | China’s monetary stimulus: Can it fight deflation?

On Tuesday, China’s central bank acted again to keep the Chinese economy from getting worse. Recall that in July, it had cut a swathe of rates. Its latest stimulus package includes a 20-basis-points cut in its 7-day reverse repo rate to 1.5%, as well as a reduction in the reserves that banks must hold. 

Mortgage rates have been eased, which may help stabilize a wobbly market for property that’s yet to recover from its pandemic crash. Separately, a window for stock brokers and asset funds to access central bank money is expected to support equity values. 

But the economy’s growth slump, with this year’s 5% GDP expansion target looking elusive, means policymakers have more than softening assets to worry about. With people’s pay under pressure, sagging retail prices mean deflation haunts China. 

Also read: China central bank takes more steps to boost flagging economy

Falling prices can make people sit on money, reducing overall demand, setting off a downward spiral and hurting business prospects. As Japan found, real lending rates going high can be a dampener that’s hard to lift. 

Monetary easing can restore stability if done in time. Dodgy Chinese data, though, adds a big dose of uncertainty to the effect this week’s action will have. That’s unfortunate.