China is drifting toward a deflation trap

China is drifting toward a deflation trap

With consumer inflation flatlining, producer prices falling and the property sector possibly heading into a double-dip recession, China is at growing risk of slipping into a deleveraging and deflation phase, write Wei Yao and Michelle Lam.
 
"China's economic position shares a lot of similarities with that of Japan's three decades ago, including a housing bubble, bad debt and aging demographics," say the Societe Generale economists. The key lesson from Japan, they say, is that "policymakers should avoid doing too little, too late and step up easing."
 
China has a number of possible policy options including debt restructuring and providing direct income support to households, they say, "but all of them would require a reset in the government's conservative mindset toward fiscal discipline."