Yi Gang, former head of the People’s Bank of China, emphasized the need for policymakers in China to prioritize boosting domestic demand during his speech at the Bund Summit in Shanghai. He highlighted the importance of focusing on combating deflationary pressure, particularly in the current economic climate. According to Yi, the key to addressing this issue lies in improving domestic demand, effectively managing the real estate market, addressing local government debt problems, and restoring confidence in society.
Proactive Fiscal and Monetary Policies
Yi Gang stressed the significance of implementing proactive fiscal policies and accommodative monetary policies to stimulate economic growth in China. In contrast to the high inflation rates experienced in the U.S. and Europe, China has been facing deflationary pressures, leading to a decline in consumer prices in recent years. As a result, policymakers need to adopt measures to revitalize domestic demand and boost consumer confidence.
The Consumer Price Index (CPI) in China is expected to show a slight increase from 0.5% year-on-year growth in July to 0.7% in August, according to economists surveyed by Reuters. However, Yi Gang projected that the consumer price index would eventually rise above zero by the end of the year, while the producer price index is likely to reach zero after recording negative figures in recent months. The core CPI, which excludes food and energy prices, showed a decrease from 0.6% in June to 0.4% in July.
Monetary Policy Tools
Zou Lan, the director of the PBoC’s monetary policy department, mentioned that the central bank still has room to lower the reserve requirement ratio as part of its monetary policy toolkit. This measure determines the amount of cash that banks are required to hold, offering greater flexibility in managing the country’s monetary policy. Additionally, the PBoC has introduced various supportive measures, such as trade-in policies to boost consumption and interventions in the real estate market to stimulate sales and investment in new properties.
Chinese policymakers are faced with the challenge of addressing the housing crisis and ensuring sufficient domestic demand to sustain economic growth. Jeffrey J. Schott, a senior fellow at the Peterson Institute for International Economics, emphasized the importance of managing these issues to uplift living standards in China. The impact of the pandemic on consumer sentiment has led to a decline in retail sales in major cities such as Beijing and Shanghai, highlighting the need for decisive actions to reinvigorate consumer confidence.
Avoiding Prolonged Deflation
Haruhiko Kuroda, former head of the Bank of Japan, cautioned against prolonged deflationary conditions, even if they are mild, as they can have negative implications for wage determination. Drawing parallels between China and Japan, Kuroda emphasized the need to avoid prolonged periods of deflation to prevent stagnation in wage growth. He highlighted Japan’s experience with deflation and its implications for wage increases, signaling the importance of proactive measures to stimulate economic growth in China.
Boosting domestic demand in China is crucial for overcoming deflationary pressures and sustaining economic growth. By implementing proactive fiscal and monetary policies, addressing challenges in the real estate market, and restoring consumer confidence, policymakers can create a more resilient and dynamic economy for the future.