China’s policymakers are facing significant challenges when it comes to addressing deflationary pressures and stimulating domestic demand. Yi Gang, former head of the People’s Bank of China, emphasized the importance of focusing on boosting domestic demand during his speech at the Bund Summit in Shanghai. He highlighted the need for proactive fiscal policy and accommodative monetary policy to combat the current economic situation.
In contrast to high inflation rates in the U.S. and Europe, China has been experiencing a decline in consumer prices. The latest Consumer Price Index (CPI) data indicates a marginal increase, with expectations for a slight uptick from 0.5% year-on-year growth in July to 0.7% in August. Yi Gang predicts that the consumer price index will eventually rise above zero by the end of the year, while the producer price index is expected to reach zero after months of negative prints.
One of the major challenges for Chinese policymakers is managing 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 addressing these challenges to improve living standards for the population. The government’s efforts to support the real estate market and boost consumption have seen some progress, but more needs to be done to stimulate economic growth.
Chinese consumption has been lackluster since the onset of the pandemic, with retail sales in major cities like Beijing and Shanghai experiencing significant declines. Uncertainty about future income and the impact of the real estate market slump have contributed to low consumer sentiment. It is essential for policymakers to address these concerns and create an environment that fosters consumer confidence and spending.
Haruhiko Kuroda, former head of the Bank of Japan, highlighted the importance of avoiding prolonged deflation, even if it is mild. He pointed out that Japan’s 15-year deflationary period had a significant impact on wage determination, limiting the growth of wages for many years. Chinese policymakers must learn from Japan’s experience and take proactive measures to prevent a similar situation from occurring in their country.
Boosting domestic demand and addressing deflationary pressures are critical challenges for Chinese policymakers. By implementing proactive fiscal and monetary policies, addressing the housing crisis, and stimulating consumer confidence, China can overcome these challenges and sustain economic growth. It is essential for policymakers to learn from past experiences, both domestically and internationally, to create a thriving economy that benefits all citizens.