Xi Jinping Might Have To Let Yuan Slide To Avoid Debt And Deflation Spiral, Says Economist: 'A Price Worth Paying'

China’s economy is at risk of being caught in a debt-deflation cycle. To avoid this, the yuan might need to devalue, according to economist Shang-Jin Wei, Business Insider reported.

The former chief economist at the Asian Development Bank observed a decline in consumer prices and producer deflation lasting a year. The public and private sectors have also accumulated substantial debts due to pandemic-related spending and easy-money policies.

Wei described the dual threats of debt and deflation as a “toxic combination”. He warned that this could trigger a vicious cycle of plunging demand, investment, output, and income.

Despite Xi Jinping‘s efforts to revive the economy, the People’s Bank of China (PBOC) has not yet introduced substantial liquidity. Wei suggested the PBOC could consider a quantitative easing strategy similar to the bond-buying sprees initiated by the Federal Reserve and other monetary authorities after the 2008 financial crash.

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However, Wei acknowledged that aggressive quantitative easing could further weaken the yuan, which has already depreciated by about 5% against the US dollar over the past year.

“But if the price of saving the economy from entrenched deflation is a weaker renminbi, it is a price worth paying – and could even serve as a useful adjustment mechanism by boosting foreign demand for Chinese products,” Wei said. 

He suggested that rather than trying to manage the exchange rate, Chinese authorities should leave such adjustments to market forces.

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