China’s policymakers face a critical challenge in boosting domestic demand, according to Yi Gang, former head of the People’s Bank of China. Yi emphasized the importance of fighting deflationary pressure and improving domestic demand to stimulate economic growth. He highlighted the need to address issues in the real estate market and local government debt to restore confidence in society. Yi advocated for a proactive fiscal policy and accommodative monetary policy to address the current economic challenges facing China.
Unlike the high inflation experienced in the U.S. and Europe, China has faced a decline in consumer prices in 2023. The latest data suggests a marginal increase in consumer prices, with expectations for the consumer price index to reach above zero by the end of the year. The producer price index has also shown negative prints in recent months but is expected to reach zero soon. Yi’s insights shed light on the importance of managing consumer prices to ensure economic stability and growth in China.
Zou Lan, director of the PBoC’s monetary policy department, highlighted the central bank’s ability to adjust the reserve requirement ratio to stimulate economic activity. This tool, along with other monetary policy measures, plays a crucial role in supporting China’s economy. Chinese policymakers have announced significant support for trade-in policies to boost consumption and have taken steps to revive the real estate market. These efforts aim to address the challenges in domestic demand and ensure sustained economic growth in China.
The impact of the COVID-19 pandemic has led to subdued consumer sentiment in China, with retail sales falling in major cities like Beijing and Shanghai. Uncertainty about future income and the effects of the real estate market downturn have contributed to low consumer confidence. Addressing these issues is essential for restoring confidence in the economy and stimulating domestic demand. The challenges faced by Chinese policymakers in managing the housing crisis and maintaining economic growth require strategic interventions to support sustainable development.
Haruhiko Kuroda, former head of the Bank of Japan, emphasized the risks of prolonged deflation on wage determination. He highlighted Japan’s experience of 15 years of deflation, which hindered wage growth until recent years. Kuroda’s insights suggest that China must address deflationary pressures promptly to avoid long-term impacts on wage levels. Learning from Japan’s experience, Chinese policymakers can implement effective strategies to manage deflation and stimulate economic growth through domestic demand.
The focus on boosting domestic demand is crucial for China’s economic recovery and sustainable growth. By addressing deflationary pressures, improving consumer prices, and implementing proactive fiscal policies, Chinese policymakers can support a resilient economy. Strategic interventions in monetary policy and addressing consumer sentiment are key to ensuring long-term economic stability and prosperity in China.