The former head of the People’s Bank of China, Yi Gang, emphasized the importance of focusing on boosting domestic demand in China during the Bund Summit in Shanghai. He highlighted the need to address deflationary pressures by improving domestic demand and effectively managing challenges such as the real estate market and local government debt issues. This shift in focus towards domestic demand is essential to influencing societal confidence and sustaining economic growth in the country.
Policy Measures for Economic Revival
Yi Gang stressed the significance of implementing proactive fiscal policies and accommodative monetary policies to combat the deflationary trend in China. Unlike the United States and Europe, where inflation rates are high, China has experienced a decline in consumer prices in recent years. This has hindered the growth of domestic demand, leading to a lackluster economic performance. The upcoming Consumer Price Index (CPI) reading is anticipated to show a slight increase from the previous month, indicating a slow recovery in prices.
The current head of China’s central bank, Pan Gongsheng, along with other policymakers, is exploring various monetary policy tools to stimulate economic activities. Zou Lan, the director of the PBoC’s monetary policy department, hinted at the potential for lowering the reserve requirement ratio to inject liquidity into the banking system. This move is expected to increase access to credit and encourage spending, thereby boosting domestic demand in the country.
One of the primary challenges facing Chinese policymakers is the management of the housing crisis and ensuring sufficient domestic demand to sustain economic growth. The decline in sales and investments in new properties has impacted consumer sentiment, particularly in major cities like Beijing and Shanghai. Uncertainty regarding future income and the repercussions of the real estate market downturn have dampened consumer spending, posing a challenge to economic recovery in China.
Lessons from Japan’s Deflation
Haruhiko Kuroda, the former head of the Bank of Japan, highlighted the risks associated with prolonged deflation on wage determination. Drawing parallels with Japan’s experience, Kuroda warned against the adverse effects of deflation on long-term economic prospects. While China’s current deflationary situation is not as severe as Japan’s historical struggles, policymakers must remain vigilant to avoid prolonged deflationary cycles that could hinder wage growth and overall economic stability.
The need to boost domestic demand in China is crucial for sustaining economic growth and restoring consumer confidence. By implementing targeted policy measures, leveraging monetary tools, and addressing challenges in the real estate market, policymakers can stimulate economic activities and drive recovery. Learning from past experiences and avoiding the pitfalls of prolonged deflation will be essential in navigating the current economic landscape and ensuring a resilient future for China’s economy.