China is in the middle of its third major deflationary episode in the past three decades. The country’s global footprint is now so large that uncertainty over the timing of its exit from the current episode is one of the most important questions in the global economy today. Prior episodes offer some useful guidance on the best way forward.

China’s first modern deflation was a spillover from the traumas of the Asian Financial Crisis period of the late 1990s. The second resulted from the excesses of the Global Financial Crisis stimulus era. The current episode is also a hangover – weak consumer confidence coming out of the economic and psychological shock of the zero-COVID era, and the multi-year contraction of China’s property market.

The first episode ended as three forces came together to supercharge Chinese growth. Entry into the WTO gave China a powerful external driver. Internally, efforts to clean up financial and corporate balance sheets after the 1990s bad loan episode intersected with an urbanisation drive that was hitting warp speed. And third, China’s fixed exchange rate turned from a deflationary to a reflationary force, with the US dollar weakening on a broad front in the mid-2000s, handing China a real effective depreciation.

The second episode ended with a combination of demand and supply-side policy measures working in tandem. Supply-side reform........

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