A central bank policy adviser has recommended China increase its fiscal stimulus to promote economic growth and establish a strict inflation target to keep the world’s second-largest economy from falling into a “low inflation trap.”
Following plans to use funds from government bonds to finance trade-ins on consumer goods, China’s leaders signalled that the country’s fiscal support for the remainder of the year will “focus on consumption,” to increase incomes and social welfare.
“We need to increase the intensity of macroeconomic policies, especially to implement the already arranged fiscal expenditures as soon as possible,” Huang Yiping, a policy adviser to the People’s Bank of China (PBOC), said in an article published by Peking University’s National School of Development on its WeChat account, as reported by the Zawya.
The school’s director, Huang, is a well-known Chinese economist who made the argument that overly cautious policy approaches from the country’s Finance Ministry and central bank could undermine economic stability in an attempt to preserve policy stability.
“If policies are conservative, once they affect economic stability, there will be no more policy stability,” he said.
Huang suggested that China accelerate its fiscal spending and change its policy of prioritising investment over consumption.
He also called for measures to enable more migrant workers to settle in cities and provide cash hand-outs to locals.
The second-largest economy in the world experienced deflationary pressures in the second quarter of 2024, growing at a slower rate of 4.7% than anticipated. Retail sales and imports significantly underperformed industrial output and exports.
The government has set a target for economic growth of about 5% for 2024. According to Huang, the government ought to establish a “rigid” yearly target for consumer inflation of 2-3% and raise the bar for attaining moderate inflation so that it is comparable to the goal of economic growth.
“If we really fall into the low inflation trap, the consequences will be very serious,” he said.