China should focus on fighting deflationary pressure

SHANGHAI — China’s policymakers must focus on boosting domestic demand, Yi Gang, the former head of the People’s Bank of China, told the Bund summit in Shanghai on Friday.

“I think now they should focus on fighting deflationary pressure,” Yi said, adding that “the key word is: how to improve domestic demand, how can they successfully deal with the housing market situation as well as the local market. the issue of government debt and influences public confidence’.

“Right now, proactive fiscal policy and accommodative monetary policy are important,” he said.

In contrast to high inflation in the US and Europe, China’s consumer prices eased in 2023 and have risen only marginally so far this year as domestic demand remains weak.

The latest CPI gauge, due on Monday, is expected to have risen from an annual increase of 0.5 percent in July to 0.70 percent in August, according to economists polled by Reuters. That would still be the fastest since the CPI rose 0.7% in February.

Yi said he expects the consumer price index to “converge above zero by the end of the year,” while the producer price index is likely to reach zero after negative prints in recent months.

Core CPI, which excludes food and energy prices, rose 0.4 percent in July from a year ago, down from 0.6 percent in June and May.

Yi served as governor of the PBoC from March 2018 to July 2023. Pan Gongsheng is the current head of China’s central bank.

Zou Lan, director of the PBoC’s monetary policy department, told reporters on Thursday that the central bank still has room to cut the reserve requirement ratio, which determines the amount of cash banks must have on hand. It is just one of the PBoC’s many monetary policy tools.

In July, Chinese policymakers announced major support for an exchange rate policy to boost consumption. While central and local authorities also took steps to shore up the massive housing market, sales and investment in new properties continued to fall.

“The challenge for Chinese policymakers is to manage the housing crisis and ensure that there is sufficient domestic demand to maintain the high level of economic growth,” Jeffrey J. Schott, a senior fellow at the Peterson Institute for International Economics, told reporters. .

“This is so important for the Chinese economy and for moving more and more people to higher living standards,” he said.

Chinese consumption has remained weak since the pandemic. In the major cities of Beijing and Shanghai, retail sales fell 3.8 percent and 6.1 percent respectively in July from a year ago, official data showed.

Major factors behind subdued consumer sentiment include uncertainty about future incomes and the impact on wealth from the downturn in the housing market.

“Central banks should avoid prolonged, even mild, deflation that could affect wage-setting,” Haruhiko Kuroda, the former head of the Bank of Japan, said at the same meeting as Yi.

Kuroda pointed out that China’s current deflationary situation was much shorter than what Japan faced. But he said 15 years of deflation in Japan had kept wages from rising significantly until the past year or two.

— CNBC’s Sonia Heng contributed to this report.