China’s former head of the People’s Bank of China, Yi Gang, emphasized the importance of focusing on boosting domestic demand during the Bund Summit in Shanghai. He highlighted the need to combat deflationary pressure and improve confidence in society. Yi stressed the significance of utilizing proactive fiscal policy and accommodative monetary policy to address the challenges faced by the real estate market and local government debt issues.
Unlike the high inflation experienced in the U.S. and Europe, China has seen a decrease in consumer prices in recent years. With domestic demand remaining lackluster, China’s consumer prices are expected to rise only marginally in the upcoming months. Yi Gang projected that the consumer price index would eventually converge above zero by the end of the year, while the producer price index is likely to reach zero after a series of negative readings.
Monetary Policy Tools
The current head of China’s central bank, Pan Gongsheng, along with Zou Lan, director of the PBoC’s monetary policy department, have highlighted the importance of utilizing various monetary policy tools. Lan mentioned that there is still room to lower the reserve requirement ratio, which can influence the amount of cash banks need to hold. This, coupled with other policy initiatives, aims to stimulate economic growth and boost domestic demand in the country.
One of the major challenges faced by Chinese policymakers is managing the housing crisis and ensuring sufficient domestic demand to sustain economic growth. With sales and investments in new properties declining, efforts to revitalize the real estate market and increase consumer sentiment are crucial. Jeffrey J. Schott, a senior fellow at the Peterson Institute for International Economics, underlined the importance of maintaining high levels of economic growth to improve living standards for Chinese citizens.
The ongoing pandemic has further exacerbated China’s economic challenges, leading to a decline in retail sales in major cities like Beijing and Shanghai. Factors such as uncertainty around future income and the repercussions of the real estate market downturn have dampened consumer sentiment. Central banks, like the People’s Bank of China, must act decisively to avoid prolonged deflation, which could have detrimental effects on wage determination and overall economic stability.
Comparative Analysis
Haruhiko Kuroda, former head of the Bank of Japan, compared China’s current deflationary situation to Japan’s prolonged deflation period. While China has managed to address deflation more swiftly, Kuroda cautioned against the negative impact of prolonged deflation on wage growth. He highlighted Japan’s experience of 15 years of deflation, which hampered wage increases until the situation began to improve in recent years.
Boosting domestic demand is crucial for China’s economic recovery and sustained growth. By implementing proactive fiscal policies, accommodative monetary measures, and targeted interventions to support key sectors like real estate and consumer spending, Chinese policymakers can navigate the current challenges and pave the way for a more resilient and prosperous economy.