Stagflation in China is a ‘Very Real’ Risk in the Next Couple of Quarters, Says Analyst

Stagflation is "very real" in China over the next several quarters, according to an analyst, as factory gate costs climb at a faster rate and economic development is hampered by a power shortage.

Stagflation is a term used to describe a situation in which the economy is experiencing both stagnating activity and rising inflation. The phenomenon was initially noticed in the 1970s, when an oil shock resulted in a prolonged period of rising prices but rapidly declining GDP growth.

In China, the producer price index increased 10.7% in September compared to the same month the previous year, the quickest rate since data collection began in October 1996. Meanwhile, widespread power outages have caused several major banks to lower their GDP predictions for China.

According to Charlene Chu, senior analyst for China macro-financial at Autonomous Research, this predicament has made it impossible for Chinese authorities to significantly stimulate the economy.

Chu said on CNBC's "Street Signs Asia" that stimulus could increase energy consumption and exacerbate current power shortages. At the same time, she predicted that factories forced to shut down for several days a week owing to the power outage will continue to stymie economic growth.

"As a result, I believe we are in a scenario where there are many things weighing on growth right now that are unlikely to go away anytime soon, and we are unlikely to see substantial Chinese stimulus in the next months," Chu added.

"That will be a different dynamic for the globe to adjust to," the expert continued, saying that the world has grown accustomed to China boosting its way out of various economic binds.

No 'crisis of confidence' in property

China's economy is facing a number of difficulties. The third quarter's 4.9 percent year-over-year increase was the slowest in a year.

Aside from the power shortage, which has hampered industry output, a decline in the real estate sector has also slowed growth.

Evergrande and other developers have failed to repay their debts, bringing problems in China's real estate market to the fore in recent months. This came after Beijing launched a drive to limit property developers' excessive borrowing.

The decline in the real estate sector, according to Chu, has "severely" harmed China's economic growth. However, according to the expert, the country has not yet reached a stage where confidence in the primary property market is eroding.

"I don't believe the authorities are attempting to create a trust problem throughout the entire developer sector," Chu added.