(Bloomberg) -- Former People’s Bank of China Governor Yi Gang said his nation should focus on ending deflation, in a rare admission by a prominent figure in China that falling prices are threatening the country’s growth outlook.
“I think right now they should focus on fighting deflationary pressure,” Yi said at a panel discussion at the Bund Summit in Shanghai on Friday.
China’s immediate focus should be to turn its gross domestic product deflator positive in the coming quarters, the former PBOC chief said. He pointed out that the broad measure of prices had been negative for several quarters.
Yi’s comments marked one of the most explicit acknowledgments by a former PBOC official of concerns over China’s deflation, which could weigh on the economy as falling prices lead consumers to delay purchases and businesses to slash wages.
Analysts in China have been advised to avoid discussing sensitive terms such as “deflation” or expressing views deemed overly negative for the economy. That comes as the country’s GDP deflator marked its longest slide since 1999.
The measure of economy-wide prices represents the gap between nominal and real GDP growth rates. China aims to achieve about 5% real economic growth this year, a rate that has been better than nominal growth due to deflation.
“Overall we have the problem of weak domestic demand, especially on the consumption and investment side, so that needs proactive fiscal policy and accommodative monetary policy,” he said.
Yi’s remarks contrast with his tenure that was marked by restrained policy, underlining the urgency to address deflation. The former PBOC chief appeared to downplay risks of deflation just a month before he stepped down last July, saying there’s a time lag between the post-pandemic rebound in demand and supply.
China’s economic recovery is still underway but relatively slow, Yi said at the panel alongside former central bankers including Haruhiko Kuroda, former Governor of the Bank of Japan, and Donald Kohn, former Vice Chairman of the Federal Reserve.
Yi said he hopes the country’s producer price index will emerge from negative territory by the end of this year. Producer prices fell for 22 straight months in July, underscoring persistent deflationary pressures.
Echoing Yi’s suggestion, Kuroda said Japan’s experience dealing with 15 years of deflation indicates that central banks should avoid prolonged deflation even if it’s mild. He explained persisting deflation, or low inflation, could lead to a rigid mindset about wage increase, which would make it much more difficult to achieve higher inflation.
Kohn said China should ease monetary policy further to drum up demand. Speaking in a group interview, the ex-Fed official said the PBOC could still use traditional tools such as cutting interest rates and probably doesn’t need to turn to unconventional polices such as quantitative easing yet.
(Updates with more context and comments)
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