China’s former head of the People’s Bank of China, Yi Gang, emphasized the importance of prioritizing domestic demand in order to combat deflationary pressures during his speech at the Bund Summit in Shanghai. He pointed out that the key to improving the situation lies in addressing the real estate market as well as local government debt issues, and restoring confidence in society. Yi stressed that China’s policymakers should concentrate on proactive fiscal policies and accommodative monetary measures to stimulate the economy.
Contrary to high inflation in the U.S. and Europe, China has been facing a decline in consumer prices with marginal increase recently due to lackluster domestic demand. The latest Consumer Price Index (CPI) is expected to rise from a mere 0.5% growth in July to 0.70% in August. Yi predicted that the CPI would reach above zero by the end of the year, while the Producer Price Index (PPI) is likely to hit zero after experiencing negative growth in recent months. The core CPI, excluding food and energy prices, also saw a decrease from 0.6% in June and May to 0.4% in July.
Yi’s successor, Pan Gongsheng, alongside Zou Lan, director of the PBoC’s monetary policy department, mentioned the possibility of lowering the reserve requirement ratio to enhance liquidity in the banking system. This move is part of a series of measures to support the economy, including a trade-in policy to boost consumption and efforts to revitalize the real estate market. Despite these initiatives, sales and investments in new properties have declined, posing a challenge for policymakers.
Jeffrey J. Schott, a senior fellow at the Peterson Institute for International Economics, highlighted the importance of managing the housing crisis and securing sufficient domestic demand to sustain economic growth and improve living standards in China. The subdued consumer sentiment following the pandemic has led to a decrease in retail sales in major cities like Beijing and Shanghai, reflecting uncertainties regarding future income and the impact of the real estate market downturn.
Former head of the Bank of Japan, Haruhiko Kuroda, cautioned against prolonged deflation, even if mild, as it can hinder wage growth. Drawing a comparison to Japan’s 15-year deflationary period, Kuroda emphasized the negative impact it had on wage determination. He urged central banks to take preemptive measures to prevent long-lasting deflationary trends that could impede economic recovery.
China faces the challenge of reviving domestic demand and addressing deflationary pressures to sustain economic growth and enhance consumer confidence. Policymakers must adopt a comprehensive approach that combines fiscal stimuli and monetary policy adjustments to navigate the current economic landscape effectively. Failure to address these issues could prolong the economic downturn and hinder the country’s path to prosperity.