China’s Former Central Bank Governor Urges Action Against Deflationary Pressure, According to Reuters

By Li Gu and Casey Hall

SHANGHAI – China’s former central bank governor Yi Gang emphasized on Friday that the country needs to prioritize combating deflationary pressures as its economy, the second-largest in the world, continues to struggle to gain momentum despite numerous policy support initiatives.

Yi’s remarks came amidst concerns over shrinking profit margins for businesses and pay cuts for workers within the $18 trillion economy. Issues such as a property market crisis and subdued domestic demand have negatively impacted both investor and consumer confidence.

"I think right now they should focus on fighting the deflationary pressure. If you look at nominal GDP, it’s positive, but it’s also essential to consider people’s income and tax revenue," Yi, who serves as the deputy head of the economic committee of the Chinese People’s Political Consultative Conference (CPPCC), stated at the Bund Summit in Shanghai.

Although China’s economy grew by 5.0% in the first half of 2024, momentum has decreased since the second quarter.

"The key challenge is enhancing domestic demand and addressing the issues surrounding the real estate market and local government debt," Yi noted, stressing the importance of job security and income prospects for individuals.

The unemployment rate among 16- to 24-year-olds in China, excluding students, rose to 17.1% in July from 13.2% in June.

"We are dealing with a fundamental problem of weak domestic demand, particularly in the areas of consumption and investment. This necessitates proactive fiscal and accommodating monetary policies," Yi explained.

The central bank of China has indicated that maintaining price stability and ensuring moderate inflation will be crucial components of its monetary strategy.

From January to July, the consumer price index (CPI) grew by an average of just 0.2% year-on-year, while the producer price index (PPI) has experienced deflation for almost two years.

"The immediate focus should be to turn the GDP deflator positive. Even though we recognize the challenges, we must do our utmost," Yi stated.

Recently, investment bank UBS adjusted its forecast for China’s GDP deflator, lowering it from 0 to -0.4 for 2024, citing factors such as a prolonged downturn in the property market leading to reduced upstream product prices, weaker consumer demand, and intensified price competition overall.