China’s policymakers, according to Yi Gang, the former head of the People’s Bank of China, must prioritize boosting domestic demand to combat deflationary pressure. The key focus should be on improving domestic demand, addressing issues in the real estate market, local government debt problems, and restoring society’s confidence. Proactive fiscal policies and accommodative monetary policies are crucial at this point to stimulate economic growth and consumer spending.
In contrast to the high inflation levels in the U.S. and Europe, China has experienced a decline in consumer prices in recent years. The latest data suggests a marginal increase, with the consumer price index expected to rise slightly. However, the core CPI, which excludes food and energy prices, has shown a decrease in growth from the previous months. The former PBoC governor, Yi Gang, predicts a convergence of the consumer price index above zero by the year-end, indicating a slow recovery in domestic demand.
The People’s Bank of China has various monetary policy tools at its disposal, with the reserve requirement ratio being one of them. Despite recent adjustments to boost consumption and support the real estate market, domestic demand remains subdued. Chinese policymakers face the challenge of managing the housing crisis while ensuring sufficient domestic demand to sustain economic growth. Experts like Jeffrey J. Schott emphasize the importance of maintaining a high level of economic growth for improving citizens’ living standards.
Since the onset of the pandemic, Chinese consumption has been lackluster, particularly in major cities like Beijing and Shanghai. Retail sales have declined, reflecting low consumer sentiment due to income uncertainties and the real estate market’s impact on wealth. Experts caution against prolonged deflation, as it can impact wage determination and hinder economic progress. Haruhiko Kuroda, the former head of the Bank of Japan, highlights the importance of avoiding prolonged deflation to prevent stagnation in wage growth.
Overall, the need to boost domestic demand in China is crucial for achieving sustainable economic growth and improving living standards for its citizens. Policymakers must address key challenges such as the real estate market crisis and low consumer sentiment to stimulate economic activity and restore confidence in the economy. Collaborative efforts between fiscal and monetary policies are essential to navigate through the current economic uncertainties and pave the way for a more resilient and prosperous future for China.