China should focus on dealing with deflationary pressures | Wilnesh News

SHANGHAI – Chinese policymakers need to focus on boosting domestic demand, Yi Gang, former governor 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 Gang said, adding, “The key words are: how to improve domestic demand, how to successfully deal with the real estate market and the local situation.” Government debt issues, impact social confidence.

“At this point, active fiscal policy and loose monetary policy are important,” he said.

In stark contrast to high inflation in the United States and Europe, consumer prices in China fell in 2023 and have only recovered slightly so far this year as domestic demand remains sluggish.

The latest CPI data due on Monday is expected to rise to 0.70% in August from an annual rate of 0.5% in July, according to economists polled by Reuters. That’s still just the fastest CPI rise since February, when CPI rose 0.7%.

Yi Gang said he expected the consumer price index “to trend above zero by the end of the year,” while the producer price index could reach zero after turning negative in recent months.

The core consumer price index (CPI), which excludes food and energy prices, rose 0.4% annually in July, down from 0.6% in June and May.

Yi Gang served as the governor of the People’s Bank of China from March 2018 to July 2023.

Zou Lan, director of the Monetary Policy Department of the People’s Bank of China, told reporters on Thursday that the central bank still has room to reduce the deposit reserve ratio, which determines the amount of cash banks need to hold. It is just one of the People’s Bank of China’s multiple monetary policy tools.

In July, Chinese policymakers announced strong support for the trade-in policy to stimulate consumption. Sales and investment in new properties fell even as central and local authorities also took steps to boost the massive real estate market.

“The challenge for Chinese policymakers is to deal with the housing crisis and ensure that there is enough domestic demand to maintain a high level of economic growth,” Jeffrey Short, a senior fellow at the Peterson Institute for International Economics, told reporters on Thursday.

“This is very important for China’s economy and for more and more people to improve their living standards,” he said.

Since the epidemic, China’s consumption has continued to be sluggish. Retail sales declined in major cities such as Beijing and Shanghai 3.8% and increased by 6.1%Official data showed July compared with the same period last year.

Key factors behind low consumer confidence include uncertainty about future income and the impact of the downturn in the housing market on wealth.

Former Bank of Japan Governor Haruhiko Kuroda told the same meeting as Yi Gang that “the central bank should avoid long-term deflation, even mild deflation, which could affect wage decisions.”

Haruhiko Kuroda pointed out that China’s current deflationary situation is much shorter than that faced by Japan. But he said Japan’s 15-year deflation has prevented wages from rising significantly until the last year or two.

—CNBC’s Sonia Heng contributed to this report.