Yi Gang, the former head of the People’s Bank of China, emphasized the importance of boosting domestic demand in China during the Bund Summit in Shanghai. According to Yi, policymakers should concentrate on combating deflationary pressure and improving domestic demand. This involves addressing issues in the real estate market, local government debt, and restoring societal confidence.
Yi Gang highlighted the significance of proactive fiscal policies and accommodative monetary policies in addressing the current economic challenges in China. He mentioned that these policies are essential to stimulate domestic demand and revive the economy, which has been experiencing lackluster growth.
Unlike the high inflation rates observed in the U.S. and Europe, China has been facing deflationary pressure. Consumer prices in China fell in 2023 and have only shown marginal increases this year due to weak domestic demand. Economists are expecting a slight uptick in the Consumer Price Index (CPI) for August, following a 0.5% year-on-year growth in July.
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 to inject liquidity into the economy. This is part of the PBoC’s efforts to support economic growth and stimulate domestic demand.
Chinese policymakers are facing challenges in managing the housing crisis and ensuring sufficient domestic demand to sustain economic growth. Sales and investments in new properties have declined, impacting consumer sentiment. The uncertainty surrounding future income and the effects of the real estate market slump are major factors contributing to low consumption levels.
Data from major cities like Beijing and Shanghai indicate a significant decline in retail sales, reflecting subdued consumer sentiment. The prolonged deflationary environment in China could impact wage determination, as highlighted by Haruhiko Kuroda, the former head of the Bank of Japan.
Kuroda pointed out that while China’s current deflationary situation is relatively short compared to Japan’s experience, prolonged deflation can hinder wage growth. In Japan, 15 years of deflation prevented significant increases in wages until recent years.
Boosting domestic demand is crucial for China to address deflationary pressures, stimulate economic growth, and enhance consumer confidence. By implementing proactive fiscal and monetary policies, addressing challenges in the real estate market, and supporting consumer spending, Chinese policymakers can navigate the current economic challenges and pave the way for sustainable growth.
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