{"text":[[{"start":7.45,"text":"The writer is chief economist for Asia Pacific at Natixis and senior research fellow at Bruegel"}],[{"start":13.5,"text":"For a brief moment in the opening days of the Iran crisis, it seemed as though China might finally be dragged into the global reflation trade. Ten-year Chinese sovereign bond yields nudged upward from 1.83 per cent on February 27 right before the US-Israeli attack on Iran to 1.90 per cent on March 9 — a move in sympathy with the broader trend in bond markets worldwide on rekindled inflation fears. "}],[{"start":39.75,"text":"Traders were, for once, treating China like everywhere else but they were wrong to do so. Within weeks, those yields had retraced their modest climb and returned to 1.82 per cent on April 3. That quiet reversion is a more eloquent piece of economic commentary than almost anything published in official communiqués. It is the market’s verdict that China’s deflationary undertow remains dominant — and that verdict deserves to be taken seriously."}],[{"start":68.35,"text":"The mechanics are straightforward. Reflation, properly understood, requires one or both of two things: a meaningful loosening of monetary conditions or a significant expansion of fiscal stimulus. China has neither of the two at the scale required."}],[{"start":85.05,"text":"On the monetary side, the People’s Bank of China has not eased an inch, having left its benchmark lending rates unchanged in March, which means that they have been steady for 11 months in a row. Real borrowing costs remain elevated due to the very low if not negative inflation, depending on what index you use. Credit demand from households and small businesses is anaemic not because money is unavailable, but because confidence is absent and real rates are simply too high."}],[{"start":112.55,"text":"Fiscal policy tells a similarly constrained story. China’s central government retains the balance sheet capacity to stimulate boldly, but it has shown little appetite to deploy it in ways that reach consumers. Infrastructure spending — the traditional lever — pushes money into the capital stock of an economy already burdened by excess capacity. Local governments, meanwhile, are in fiscal retrenchment mode, still digesting accumulated debts. Voucher schemes to boost consumption and household subsidies have been too modest and too targeted to shift the aggregate demand needle. "}],[{"start":147.4,"text":"The oil shock injects a further complication that is specific to China’s circumstances. The conventional wisdom holds that a commodity price surge is inflationary: it raises input costs and, in an economy running near capacity, feeds into final prices. But China is not running near capacity. It is running well below it, across steel, chemicals, solar panels, electric vehicles and a dozen other industries."}],[{"start":null,"text":"
"}],[{"start":175.20000000000002,"text":"The problem with an oil shock for China is therefore not that it ignites inflation at home — domestic demand is too weak for that transmission to operate normally — but that it depresses the one engine that has been keeping China’s factory sector from outright contraction. External demand has been the release valve for Chinese overproduction. Higher energy prices inevitably hurt global growth and the purchasing power of many of China’s trading partners. This means that export orders are bound to slow, making the excess capacity problem of the Chinese economy more acute."}],[{"start":207.25,"text":"More capacity chasing less demand is, by definition, deflationary. It pushes factory-gate prices lower, squeezes margins, discourages new investment and perpetuates the wage and income stagnation that China has been suffering from for years. Already in 2025, when China’s GDP growth rate managed to reach the 5 per cent target, wages barely grew an estimated 1 per cent for urban private-sector workers, which explains why consumption remained so weak. In other words, the oil shock, paradoxically, risks deepening China’s deflationary trap rather than providing any escape from it."}],[{"start":245.7,"text":"There is a scenario in which this picture changes. A genuine pivot in Beijing’s approach to fiscal policy: one involving direct and substantial transfers to households, a credible restructuring of local government debt or a sustained programme of social safety-net expansion sufficient to reduce precautionary saving. Similarly, a more aggressive monetary framework, one prepared to accept looser financial conditions in exchange for nominal growth, could begin to shift expectations. Neither is on the immediate horizon."}],[{"start":276.05,"text":"While the rest of the world experiences higher yields on inflation fears, China’s long rates remain subdued, even lower than before the shock. That is not the signature of an economy on the verge of reflation. Not even a major shock in the global oil market is likely to change China’s entrenched problem."}],[{"start":298.8,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1777086113_7064.mp3"}