The people portraying China as a source of global deflation are making a fuss and their argument is not sensible, economists said.

Some of China's exports may exert downward pressure on products competing with them on the international market, but the impact on overall prices is insignificant given China's small share of global trade, they said.

In addition, the price declines caused by Chinese exports are good news for overseas consumers and will not hurt demand, which is currently the key to global economic growth, they said.

Furthermore, Chinese exporters won their share in the international market with efficient production. A country should not be blamed for being cost effective, the economists argued.

Searching for somebody to blame for the weakness in the world economy, some people pointed their fingers at China, saying the country's low-priced exports led to a general decline in prices worldwide. In other words, they said China had exported deflation.

Stephen Roach, Morgan Stanley's chief economist, disagreed: "Nothing could be further from the truth," he said.

The Roach case

Interestingly, it was an analytical report by Roach, released in October, that began the debate over China exporting deflation. Roach said in the report - entitled "China Factor"- that as the world listed towards stagnation and deflation, China, which was making robust economic progress, could be singled out as a source of global deflation.

But some people and media reports quickly hyped the report as if it said China was indeed a source of global deflation. This forced Roach himself to write time and again about what he really meant.

Roach said in a separate commentary that as Chinese imports account for less than 2 per cent of Japanese gross domestic product (GDP), it is unreasonable to accuse China of sparking Japan's own self-created deflation.

The US case is similar, he said. Chinese imports represent a little more than 1 per cent of US GDP. "Like Japan, that's hardly a big enough slice of the US economy to impact the aggregate price level."

Taking a global view, the International Monetary Fund's (IMF) chief representative in China, Ichiro Otani, said Chinese exports' pressure on overall prices in the global market also "seems to be very small," because Chinese exports account for only about 5 per cent of global exports and the share of Chinese exports competing with goods from other countries is likely even smaller.

The way that the media hypes the effects of Chinese exports on international prices "does not make much sense," Otani said.

Deflation, good or bad?

Deflation is a somewhat controversial term in economics, with no universal agreement on what defines it. But most agree it is characterized by a continuous decline in prices.

However, deflation, if defined as price decline, is not necessarily bad.

Though China may be putting downward pressure on the prices of some global tradeable goods, "I believe this is good deflation, something that the rest of the world should be pleased to see, just like a fall in oil prices," said Stephen Jen, also a Morgan Stanley analyst.

This kind of price decline will not lead to a decrease in demand, Jen said.

If, Jen said, a US consumer needs now to pay only US$10 for something made in China that he used to pay US$30 for when the item was made somewhere else, is this deflationary in a bad sense?

"Clearly it is not," he said.

As a single item's price falls, the consumer is likely to spend the US$20 saved on something else, Jen explained.

"There is no reason why overall demand should fall, or the general price level should fall."

Some observed China's influence on prices in the international market from a different angle. A Reuters story last week quoted dealers as saying that the prices of some industrial commodities were actually buoyed by China's buying.

Fair Competition

The IMF's Otani stressed that Chinese exporters won their way into the international market by being more cost effective than their competitors.

"You should not blame a country for being a cost-effective producer," he said.

Zhao Jinping, a senior foreign trade expert at the State Council's Development Research Centre, agreed.

Zhao said Chinese exporters gained their strong position by increasing their productivity.

"It's a world of competition. China is simply participating in the global competition, fairly," he said.

The view of China as "exporting deflation" is just a new version of the "China threat theory," the holders of which persistently believe a developing China is a negative force in the world, Zhao said.

But in the eyes of Morgan Stanley's Roach, "the transition and development of the Chinese economy continues to represent a huge plus for the world at large."

Chinagate-finance
Pushing pilot plan of private pool
(ZHAO RENFENG)
01/20/2003

China should embark on its planned bold attempt at banking reform to further facilitate the pilot scheme of private banks, urged leading economists.
The plan needs to be carried out promptly, as the country is faced with the urgent task of quenching the cash thirst of small and medium-sized private businesses looking to develop, said experts addressing the Symposium on China's Financial Reform and Securities Market Reform, held over the weekend.

"Establishing private banks is one of the core reforms in the highly risk-sensitive banking industry. Experimental work is thus essential," chief economist of the Asian Development Bank Resident Mission in China, Tang Min, told the symposium, which was jointly sponsored by Peking University and the University of Hong Kong.

"We stress the urge to execute the plan swiftly as we may need more than three to five years to see the results of the pilot scheme," said Tang.

Media reports earlier revealed that plans for a final private bank pilot scheme had been submitted to the regulatory authorities for approval, drafted by the Great Wall Finance Research Institute, which groups some of the top economists in China.

One of the main reasons for establishing private banks is to help finance the development of the non-State sector, which is not adequately served by the four largest State banks and existing shareholding commercial banks, say experts.

Some of the country's largest private enterprises have been urging a policy change, anticipating that their stakes in private banks will give them access to easy finance and new channels to gain a foothold in the financial industry.

The government, however, has been cautious over the establishment of private banks, recalling the difficulties that occurred in the early 1990s, when private funds flooded the then newly accessible urban credit co-operatives, forcing the government to later rein in the banking industry.

"Private capital is not naturally unreliable. The tangled private financing arose from misinterpretation of government policies," said Yi Gang, senior researcher with the central People's Bank of China, adding: "Some people forecast the new access to the banking industry would be only short term and their actions went against the government's intention."

Yi told the symposium that China's banking industry, now accessed by both State and foreign funds, should be equitable to private capital, and the government needs to further improve its regulatory forces.

"One primary principle is that private banks cannot make loans to their private shareholders," said Yi.

Experts say that the government needs to introduce change, but in the process exert and proceed with caution.

"Unrestrained reform may cause more havoc to the banking industry than no reform at all," said Tang.