China must boost consumption to escape debt-deflation loop and better nominal GDP growth
nominal GDP (unadjusted for inflation) growth.
At the starting point, nominal GDP growth is at 4%, significantly lower than the 10% rate the country routinely churned out between 2017 and 2019. This is because the GDP deflator (the broadest measure of prices in the economy) has been stuck in negative territory for six consecutive quarters, the worst run since the late-1990s. So, lifting the GDP deflator back toward a 2-3% growth run rate will be key.
It is through this lens that one must evaluate the recent slate of policy actions, specifically, whether they will revive nominal GDP growth and lift China out of the debt-deflation loop. These measures are supportive, but not sufficient yet.
This is because the recent round of policy-easing has been focused on restructuring the troubled balance sheets of local governments and property developers. But to address the deflation problem head-on, more direct measures like large-scale fiscal stimulus to lift consumption and cutting excess investment will be needed.
There are three reasons why policy response has been hesitant:
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