Yi Gang, former head of the People’s Bank of China, emphasized the critical need for China’s policymakers to prioritize boosting domestic demand during the Bund Summit in Shanghai. This focus on domestic demand is crucial in combating deflationary pressures and reviving the sluggish economy. The emphasis on improving domestic demand is a strategic move to address the challenges facing the real estate market and local government debt issues, which have a significant impact on society’s confidence and economic growth.
Yi Gang highlighted the importance of proactive fiscal policies and accommodative monetary policies in stimulating domestic demand and addressing deflationary pressures. These policies are crucial tools that policymakers can utilize to support economic growth and navigate through challenging economic conditions. By implementing strategic fiscal and monetary measures, China can boost consumer spending, support businesses, and enhance overall economic stability.
China has experienced low consumer prices, with a marginal increase in 2023. The latest Consumer Price Index (CPI) is anticipated to rise slightly, indicating a slow recovery in consumer prices. However, the subdued growth in consumer prices reflects the weak domestic demand and the challenges facing the economy. Yi Gang projected that the consumer price index is likely to reach positive territory by the end of the year, signaling a potential improvement in economic conditions.
Zou Lan, director of the PBoC’s monetary policy department, suggested that the central bank still has room to lower the reserve requirement ratio to boost liquidity and stimulate lending. This monetary policy tool, among others, offers flexibility for policymakers to address economic challenges and support growth. By utilizing a combination of monetary measures, China can enhance liquidity in the financial system and promote economic recovery.
The real estate market in China poses a significant challenge for policymakers, as sales and investments in new properties have declined. Efforts to support the real estate market have been met with limited success, reflecting the lingering issues in the housing sector. Managing the housing crisis and ensuring sustained domestic demand are key priorities for policymakers to maintain economic growth and support living standards.
The impact of the pandemic on consumer sentiment has been substantial, with major cities like Beijing and Shanghai experiencing a decline in retail sales. Uncertainty surrounding future income and the effects of the real estate market downturn have dampened consumer confidence, leading to decreased spending. To address these challenges, policymakers need to implement targeted measures to boost consumer sentiment and encourage spending.
Haruhiko Kuroda, former head of the Bank of Japan, highlighted the risks of prolonged deflation on wage determination, drawing parallels between China’s current situation and Japan’s deflationary past. The stagnation in Japan’s economy due to deflation inhibited wage growth for an extended period, underscoring the importance of addressing deflationary pressures promptly. By learning from Japan’s experience, Chinese policymakers can take proactive measures to prevent a prolonged deflationary period and support sustainable economic growth.
Overall, the focus on boosting domestic demand and implementing effective fiscal and monetary policies are crucial steps for Chinese policymakers to address deflationary pressures, support economic recovery, and achieve sustainable growth. By strategically managing challenges in the real estate market, enhancing consumer sentiment, and learning from past experiences, China can navigate through current economic challenges and emerge stronger in the long run.
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