The former central bank governor advises China to prioritize combating deflationary pressures.

• Yi Gang, the former head of the People's Bank of China, stated on Friday at the Bund Summit in Shanghai that China's policymakers should prioritize increasing domestic demand.
• Yi predicted that the consumer price index would surpass zero by the year's end.
• Haruhiko Kuroda, former head of the Bank of Japan, advised that central banks should avoid mild deflation, as it could negatively impact wage determination.

Yi Gang, the former head of the People's Bank of China, advised China's policymakers to prioritize increasing domestic demand during a speech at the Bund Summit in Shanghai on Friday.

"Yi suggested that they should prioritize combating deflationary pressure by focusing on enhancing domestic demand, managing the real estate market and local government debt, and boosting public confidence."

He emphasized the need for proactive fiscal policy and accommodative monetary policy at this juncture.

While consumer prices in the U.S. and Europe rose in 2023, China's prices decreased and have only slightly increased this year due to low domestic demand.

According to Reuters, economists predict that the latest CPI reading, which will be released on Monday, will increase from 0.5% year-on-year growth in July to 0.70% in August. Despite this, it would still be the fastest increase since February's 0.7% CPI increase.

Yi predicted that the consumer price index would converge above zero by the end of the year, while the producer price index was expected to reach zero after negative prints in recent months.

In July, the core CPI, excluding food and energy prices, increased by 0.4% compared to the same month last year, decreasing from the 0.6% increase seen in both June and May.

Pan Gongsheng is the current governor of the People's Bank of China, replacing Yi Gang who held the position from March 2018 to July 2023.

The PBoC's monetary policy department, led by Zou Lan, revealed on Thursday that the central bank has the ability to decrease the reserve requirement ratio, which affects the amount of cash banks must keep on hand. This is just one of the PBoC's many monetary policy tools.

In July, Chinese policymakers announced significant support for a trade-in policy to stimulate consumption. Despite measures taken by central and local authorities to bolster the real estate market, sales and investment in new properties have remained sluggish.

Chinese policymakers face the challenge of managing the housing crisis and maintaining high levels of economic growth through domestic demand, according to Jeffrey J. Schott, senior fellow at the Peterson Institute for International Economics.

He emphasized the significance of this for the Chinese economy and improving people's standards of living.

Contrast with Japan

Despite the pandemic, Chinese consumption has been sluggish, with retail sales in Beijing and Shanghai falling by 3.8% and 6.1%, respectively, in July compared to the previous year.

The real estate market slump and uncertainty about future income are major factors contributing to low consumer sentiment.

Haruhiko Kuroda, the former head of the Bank of Japan, stated during the same panel session as Yi that central banks should avoid mild deflation, even if it is prolonged, as it could negatively impact wage determination.

Kuroda stated that China's current deflationary period has been shorter than Japan's, but he emphasized that 15 years of deflation in Japan hindered wage growth until recently.

— CNBC's Sonia Heng contributed to this report.