China’s policymakers, including former head of the People’s Bank of China, Yi Gang, stressed the importance of boosting domestic demand during the Bund Summit in Shanghai. Yi emphasized the need to combat deflationary pressure and improve domestic demand to tackle issues in the real estate market and local government debt. This shift in focus highlights the current challenges faced by the Chinese economy.
Yi Gang proposed that proactive fiscal policy and accommodative monetary policy are crucial at this point. While the US and Europe are dealing with high inflation rates, China has been grappling with falling consumer prices. The latest data suggests a slight increase in the consumer price index, but the overall domestic demand remains lackluster. Yi predicted that the consumer price index would gradually move above zero by the end of the year, while the producer price index is expected to reach zero after months of negative prints.
The People’s Bank of China, under the leadership of Pan Gongsheng, has various monetary policy tools at its disposal. Zou Lan, the Director of the PBoC’s monetary policy department, mentioned the possibility of lowering the reserve requirement ratio to boost liquidity in the market. This move is part of the central bank’s efforts to stimulate economic growth and increase domestic demand.
One of the key challenges for Chinese policymakers is managing the housing crisis and ensuring sufficient domestic demand to sustain economic growth. Sales and investments in new properties have declined despite efforts to support the real estate market. The uncertainty surrounding future income and the impact of the real estate market slump have contributed to low consumer sentiment in major cities like Beijing and Shanghai.
Former head of the Bank of Japan, Haruhiko Kuroda, cautioned against prolonged deflation, even if it is mild. He highlighted the negative impact of deflation on wage determination, citing Japan’s experience of 15 years of deflation. While China’s current deflationary situation has not lasted as long as Japan’s, the potential consequences on wage growth and overall economic stability are concerning.
Chinese policymakers are facing the challenge of enhancing domestic demand to stimulate economic growth and combat deflationary pressures. By implementing proactive fiscal and monetary policies, addressing issues in the real estate market, and fostering consumer confidence, China can navigate through the current economic challenges and pave the way for sustainable growth in the future. It is crucial for policymakers to strike a balance between addressing immediate challenges and laying the foundation for long-term economic prosperity.