Former Governor of the People’s Bank of China, Yi Gang, made a rare admission of the pressure China is facing from monetary tightening at the Shanghai Bund Financial Summit. Industry insiders on the mainland indicated that overall, the economic situation in China is quite grim.
China’s economy is struggling to recover, being confronted with multiple challenges such as squeezed corporate profit margins, decreasing employee salaries, a real estate crisis, and weak domestic demand impacting investor and consumer confidence.
Currently serving as the Deputy Director of the Economic Committee of the National Committee of the Chinese People’s Political Consultative Conference, Yi Gang stated on September 6th at the Shanghai Bund Financial Summit, “I believe that the focus for the current leadership should be on resisting the pressure of monetary tightening. If you look at the nominal Gross Domestic Product (GDP), it is positive, but you also need to consider people’s incomes and tax revenues.”
Private fund manager known as “LD Xiaomao Ge” believes that Yi Gang’s remarks represent a rare direct acknowledgment of the current price deflation, subdued demand among the general public, and have become a major issue affecting China’s economic development.
Data released by the National Bureau of Statistics of China on September 9th showed that in August, the Consumer Price Index (CPI) rose by 0.6% year-on-year, with significant contributions from fresh vegetables and meat, although this figure still fell below market expectations. Additionally, the Producer Price Index (PPI) in August declined by 1.8% year-on-year, exceeding market expectations.
Experts in mainland China have been offering interpretations of the aforementioned data.
“LD Xiaomao Ge” stated that the lower-than-expected CPI growth in August and a more substantial-than-expected decline in the PPI data are disappointing, indicating a very severe economic situation.
He analyzed the signals these data releases are sending.
Firstly, it highlights the objective fact of insufficient social demand under the current pressure of China’s economic growth. Whether it’s consumer spending, the inflation index, or the industrial producer price index, they all reflect the collective demand of society. When people have high consumption and strong demand, with products in short supply leading to price increases, businesses would actively expand production, resulting in a lively economy. However, when consumer demand is weak and products are not selling, oversupply occurs, forcing continuous price reductions to stimulate sales. This cycle can ultimately result in production cuts and layoffs, further reducing people’s purchasing power, leading to a deflationary scenario.
He said, “A situation of deflation in society is something many countries strive to avoid. Deflation is more destructive than inflation. The consumption and production situation currently seen in China undoubtedly reflects the escalating deflationary pressures.”
He believes that it is urgent to raise the income levels of Chinese citizens and enhance their purchasing power. The insufficient consumption by the public is not caused by a decrease in willingness to spend but rather due to a lack of financial stability and purchasing power. This is the most fundamental reason behind the issue.
Blogger “Follow Me North” analyzed that the August CPI and PPI data both indicate a deflationary trend in China’s economy.
He stated that although the CPI increased by 0.6% year-on-year, it’s important to consider the reasons behind this price rise. A significant factor was the 21.8% increase in food and vegetable prices. It’s well known that in August, due to various reasons such as weather conditions, the supply of food and vegetables faced challenges. This price increase is not due to high demand or market prosperity.
He pointed out that the 1.8% decline in the PPI in August marked the 23rd consecutive month of decrease. The 1.8% decline is considerable, with prices of automobiles, home appliances, and mobile phones rapidly dropping. Particularly in the second half of this year, the automotive industry has faced significant pricing pressures, leading many manufacturers and dealers struggling to sustain their businesses.
On August 31st, the National Bureau of Statistics of China announced that the August Purchasing Managers’ Index (PMI) for the manufacturing industry was 49.1%, down 0.3 percentage points from July and below market expectations.
“Follow Me North” pointed out that the PPI serves as a crucial indicator to judge the state of deflation. In addition to the CPI and PPI data, the August PMI of 49.1% below the 50 threshold signals economic contraction.
“Overall, based on this analysis, my long-standing assessment remains unchanged – China may be heading towards a prolonged period of over 30 years of deflation,” he concluded.