By Li Gu and Casey Hall

SHANGHAI (Reuters) – China’s former central bank governor Yi Gang stated on Friday that the country must combat deflationary pressures as the $18 trillion economy struggles to rebound despite numerous policy support measures.

Yi’s remarks followed reports of squeezed profit margins for businesses and pay cuts for employees, exacerbated by a property crisis and low domestic demand affecting both investor and consumer confidence.

“I think right now they should focus on fighting the deflationary pressure. If you look at nominal GDP, it’s positive, but you also need to look at people’s income and tax revenue,” Yi, the deputy head of the economic committee of the Chinese People’s Political Consultative Conference (CPPCC), said at the Bund Summit in Shanghai.

Although China’s economy grew by 5.0% in the first half of 2024, growth momentum has slowed since the second quarter.

“The key word is how to improve domestic demand and how they can deal with the situation of the real estate market as well as local government debt,” Yi mentioned, emphasizing the importance of employment futures and income prospects for citizens.

The jobless rate for individuals aged 16 to 24 in China, excluding students, increased to 17.1% in July from 13.2% the previous month.

“Overall we have the problem of weak domestic demand, especially on the consumption and investment sides, so that needs proactive fiscal policy and accommodative monetary policy,” Yi stated.

China’s central bank has acknowledged that maintaining price stability and ensuring moderate inflation will be significant considerations in China’s monetary policy moving forward.

The consumer price index (CPI) averaged only a 0.2% year-on-year increase from January to July, while the producer price index (PPI) has been in deflation for nearly two years.

“The immediate focus should be that the GDP deflator should be turned to positive. Even if we realise the difficulty of that, we should try our best,” Yi said.

Additionally, investment bank UBS recently downgraded its projection for China’s GDP deflator from 0 to -0.4 for 2024, citing a deeper property downturn leading to lower upstream product prices, diminished consumption demand, and heightened price competition overall.