Will Low Inflation Boost Spending in China?

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Chinese officials announced that inflation rose only 1.9% in September, a low based on recent standards. Economists viewed the data as proof that gross domestic product would drop below 8% this year, a long way from the 10% expansion the country has come to expect. Experts also believe the decline means China's central government can stimulate economic activity without immediate fear of hyperinflation.

There is another way to look at the number. Low inflation may encourage China's middle-class consumers to increase their activity because the costs of goods and services are so low. And, with low inflation, the interest rates they get on savings might be undermined.

The assumption among most experts is that China's huge middle class -- numbered as high as 250 million people -- will draw back on spending as exports slow. Factory activity has diminished, and with it perhaps the chance for higher wages and an ongoing increase in available jobs. But China has a habit of keeping workers on the job and the factory sector growing. Some of this is artificial stimulus, which includes government-underwritten projects like infrastructure expansion.

One theory is that, in the United States, consumer activity, while slow, has improved through the economic slowdown because of unique buying opportunities. Retail sales have risen, along with especially strong growth in car sales. Low interest rates may have driven some of this, but so have low prices on items other than fuel and food. China's consumers may be little different.

However, unlike the U.S., China has the capital and the lack of Washington's resistance to create a huge stimulus package, either through programs that make the banking system more likely to lend or via packages that would further extend huge programs, such as ongoing infrastructure build-outs, that employ millions.

In China, low inflation may be a unique opportunity for middle-class consumers to increase activity without the byproduct of rising prices.

Douglas A. McIntyre

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