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China Can Beat Back Deflation

It would be easy to misdiagnose the challenges China’s economy faces and underestimate its long-term growth potential. In fact, internal imbalances and policy-induced uncertainty – not a hostile external environment – are generating the most powerful growth headwinds, and these problems are entirely surmountable.

MILAN – Since the COVID-19 pandemic, China has been experiencing something unfamiliar: deflationary conditions. At this stage in China’s economic development, potential GDP growth is probably in the 5-6% range. But, relative to productive capacity, aggregate demand is far too low to realize this potential.

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