China’s former head of the People’s Bank of China, Yi Gang, emphasized the crucial need for policymakers to prioritize boosting domestic demand during his speech at the Bund Summit in Shanghai. He highlighted the urgency of fighting deflationary pressure as a key focus for China’s economic stability. Yi emphasized the importance of improving domestic demand, addressing issues in the real estate market, managing local government debt problems, and boosting societal confidence. These factors are all interconnected and play a significant role in shaping China’s economic outlook.
Yi Gang stressed the importance of implementing proactive fiscal policies and accommodative monetary policies to stimulate domestic demand and counter deflationary trends. Unlike the U.S. and European countries experiencing high inflation, China has faced a decline in consumer prices in 2023. The marginal increase in consumer prices this year reflects the persistent lackluster domestic demand in the country. The upcoming CPI data is expected to show a slight uptick, yet it remains below optimal levels for sustained economic growth.
Yi Gang predicted that the consumer price index would gradually rise above zero by the end of the year, while the producer price index is likely to reach zero after experiencing negative growth in recent months. The core CPI, excluding food and energy prices, saw a decline from previous months, indicating challenges in stimulating overall consumer spending. With Yi’s tenure at the People’s Bank of China ending in 2023, the current head of China’s central bank, Pan Gongsheng, faces the ongoing task of enacting effective monetary policies.
The Chinese government’s efforts to support the real estate market and boost consumption through trade-in policies have faced challenges. Sales and investments in new properties continue to decline, posing a threat to China’s economic growth. Jeffrey J. Schott, a senior fellow at the Peterson Institute for International Economics, highlighted the importance of managing the housing crisis and fostering domestic demand to sustain economic progress. The impact of the COVID-19 pandemic on consumption patterns remains a significant concern, with major cities like Beijing and Shanghai experiencing a decline in retail sales.
Former head of the Bank of Japan, Haruhiko Kuroda, emphasized the adverse effects of prolonged deflation on wage determination during the panel session. Kuroda compared China’s current deflationary situation to Japan’s prolonged struggle with deflation for 15 years, which hindered wage growth. He warned against the negative impact of mild deflation on long-term economic stability and urged policymakers to address the issue promptly to prevent lasting repercussions.
China faces a critical need to revitalize domestic demand, combat deflationary pressures, and address challenges in the real estate market to sustain economic growth. Implementing proactive fiscal and monetary policies, managing the housing crisis, and reshaping consumer sentiment are essential steps for China’s policymakers to navigate the current economic challenges effectively. By learning from past experiences and adopting timely interventions, China can lay a foundation for long-term economic stability and prosperity.
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