Chinese stimulus insufficient to curb deflation risks, IMF says

The real question is whether China's stimulus blitz is enough to pull the world's largest economy out of a deflationary spiral. Economists and investors have remained sceptical as they wait for more details on the stimulus plan. Now, according to a top International Monetary Fund (IMF) official, China's recent barrage of stimulus is insufficient to address the deflationary concerns.

Krishna Srinivasan, head of the IMF's Asia-Pacific department, said China "has to spend" more to address the housing catastrophe and deflation. Srinivasan noted that China needs to devote about 5 per cent of its gross domestic product to bring the property market out of a recession. According to Bloomberg calculations, that amounts to about 6.3 trillion yuan (or 885 billion dollars).

China's home prices are in the worst slump on record. The real estate crisis has wiped an estimated $18 trillion from household wealth. This has pushed China into its longest deflationary streak since 1999. Data this month showed that economic growth was slowing to the weakest in six quarters.

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Srinivasan said, "We believe the measures announced will not be sufficient because domestic demand is very weak." the IMF official added, "You have to make sure the pre-sold housing gets finished, and number two, the issue of viable versus non-viable developers has to be resolved."

This comes as the trade dispute with the European Union escalates. Beijing has now asked its automakers to halt Europe expansion in a tit-for-tat response to the EU's tariffs on car imports from China. China's directive — which isn't a mandatory order —may fuel tensions as both powers vie for dominance of the automobile industry.

While the EU and China have pledged to work toward an alternative agreement that would avoid levies, Beijing said major disagreements remain over EV tariffs.