China's problem today is deflation
Financial markets/economy
Posted by MoneyController on 10.09.2024
- 273
- 0 Follow me
What should Chinese policy makers focus on today? An answer to this question, as Evelyn Cheng writes on ‘CNBC’, was given by none other than the former President of the People's Bank of China, Yi Gang: the problem in China today is ‘deflationary pressure’.
Behind the deflationary pressure is domestic consumption, i.e. the consumption of Chinese citizens, which would be decisive for both price growth and the revival of the country's economy. This consumption, however, is growing little or not at all, and in some parts of the country it is decreasing (retail sales in cities such as Beijing and Shanghai in July were down for the last twelve months). It is difficult to explain, in a nutshell, what is holding back Chinese households‘ and consumers’ spending: on the one hand, there may be the need to save for more difficult times; on the other hand, there may be the expectation that prices will remain low, or even fall, so that consumers will be better off postponing purchases.
Another situation that could have affected the low spending propensity of Chinese citizens today is the situation in the real estate market: this sector, together with the problem of local government debt - as Yi Gang himself pointed out - is one of the biggest problems facing the People's Republic of China today. These difficult situations are likely to produce distrust among Chinese consumers. All this leads to minimal price growth, so much so that there is talk of ‘deflationary pressure’, a problem almost the opposite of what Europe and the United States have been facing so far.
As Evelyn Cheng explains in her article, Chinese policymakers seem to have already started to act in this direction: fiscal policies could become a tool to stimulate domestic consumption which, as mentioned above, is a key driver for the country's economy.
Cheng also mentions in this regard a remark by the former president of the Bank of Japan, Haruhiko Kuroda: at the same event attended by the former president of the People's Bank of China, the Bund Summit in Shanghai, Kuroda pointed out that deflation and the risks of deflation should be fought even when it appears to be mild, because of the effect it has on wages.
Read also: