Global stagflation risk ‘offers an opportunity’ for Beijing
A heightened risk of stagflation is likely to make the United States more dependent on Chinese supplies while simultaneously presenting Beijing with a strategic opportunity to move up the global value chain, according to a prominent economist.
As consumer prices in the US, European Union and Britain have soared at the fastest rate in decades, coupled with international organisations slashing their economic growth forecasts for this year, warnings have been growing louder that the global economy could slip into 1970s-style stagflation.
But such a situation, despite being a double-edged sword for China, would present the world’s second-largest economy with more opportunities than challenges, said Liu Yuanchun, president of the Shanghai University of Finance and Economics.
On a global scale, stagflation – a portmanteau of “stagnation” and “inflation” that describes an economy with little to no economic growth amid soaring prices – would also make it more difficult for the US and EU to decouple from China’s industrial and supply chains, according to Liu, who is also a government adviser.
“Due to the rising costs of living and production in the US, [American] dependence on Chinese supplies – Chinese products – will be stronger,” he said at a webinar held by the China Macroeconomy Forum think tank on Saturday.
He said surging costs of labour and raw materials would make it harder for countries with slow technological advances to displace China’s manufacturing, while the US would risk intensifying inflationary pressure if reshoring occurred in some industries.
Given that, Liu said Washington’s efforts on the supply-chain front, to rein in China’s expansion, appeared hampered.
Liu’s remarks came as the US has been stepping up moves to counter Beijing’s economic influence via the Indo-Pacific Economic Framework and its new Partnership for Global Infrastructure and Investment, backed by the Group of 7.
Meanwhile, US President Joe Biden is still considering adjusting trade war tariffs on Chinese goods to curb inflation.
Secretary of State Antony Blinken has said the US still wanted trade and investment with China as long as they were fair and did not jeopardise national security.
Liu added that severe distortions in the entire capitalist system – rather than Russia’s invasion of Ukraine, or the coronavirus pandemic – were to blame for the rising risk of stagflation.
He said the crisis was likely to mark the beginning of a once-in50-years low ebb in the global economic cycle, and this could result in a hard landing for the US economy, while the dollar’s position could be destabilised and a European debt crisis could re-emerge.
He linked the picture today to that of five decades ago, when stagflation caused a recession in the US, while the opposite happened in the former Soviet Union.
“We need to learn from the lesson that the Soviet Union failed to seize the opportunity … in the 1970s,” he said. “We must take the initiative to carry out comprehensive reforms – real reforms – to truly smooth out domestic circulation and readjust our mechanism for innovation.
“We should not provoke the US and Europe … but rather wait for their stagflation to get worse, and for these regions to be further weakened from the RussiaUkraine conflict.”
Beijing is already gauging the impact of global inflation on the Chinese economy, which has seen only a moderate rise in consumer prices while being hard hit by strict coronavirus-control measures.
On Monday, the head of the central bank, Yi Gang, said the inflation outlook appeared stable in the country.
Still, the industrial sector remains under considerable pressure from rising costs, according to May data released by the National Bureau of Statistics on Monday.
Liu also said that China’s huge production capacity could help absorb the imported price pressure, but he noted that more responsive policy instruments were needed.