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MNI INTERVIEW: China Needs  Demand Boost, Not Inflation Check

China's economy is still growing below potential, a former member of the PBOC's monetary policy committee tells MNI.

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China has room to adopt expansionary monetary and fiscal policies to boost demand as its economy is still growing below potential, a prominent policy advisor told MNI, arguing that the government is adopting a cautious fiscal stance which will sap impetus from the post-Covid recovery.

"Moderate inflation is welcome in China," Yu Yongding, a senior fellow of the Chinese Academy of Social Sciences, said in an interview. "(Chinese policy makers) should not be afraid of inflation at this stage, so long as it can be controlled at a certain level."

Soaring producer prices but still-subdued consumer inflation show manufacturers upstream in supply chains are making money while companies further down the distribution stream are still struggling to recover from the pandemic shock, said Yu.

The former member of the People's Bank of China monetary policy committee has been a prominent advocate of supportive policies to maintain growth at 6% since 2019, when some advisors began to argue that 5% would be a more sustainable rate of expansion. While China's GDP should rebound by more than 8% this year as it roars back from the pandemic shutdowns of 2020, Yu insists that the economy remains below potential and that stimulus should not be withdrawn too early.

Producer prices jumped by 9% in May, the fastest since 2008, while consumer prices rose by only 1.3%, below expectations for a 1.6% annual increase. Core CPI added only 0.9%, while headline prices fell 0.2% month-on-month.


PBOC Governor Yi Gang said last week that consumer price inflation would stay under 2% in 2021, below the target of about 3%. For a developing country like China, 3% inflation is low, Yu told MNI, calling for fiscal efforts to be sustained.

While fiscal revenue grew by 25.5% on an annual basis in the first four months of this year, spending only increased by 3.8%, according to Ministry of Finance data.

The PBOC could act in tandem with a supportive fiscal policy, Yu said, adding that if officials are worried about fueling asset price bubbles they could use other tools rather than tightening monetary policy.

Accommodative monetary policy would also help reduce capital inflows by cutting the yield spread versus international markets, Yu noted. As China has a high savings rate, hot money does more harm than good, he added, calling for additional measures to target distortions in bond, foreign exchange and equity markets. These would also lessen volatility should China-U.S. relations worsen, he said.

But, while Yu favours some capital controls, he said the yuan should be allowed to float freely, and the PBOC should intervene only when speculation drives excessive volatility in the exchange rate. More efforts should also be made to promote the development of financial derivatives, allowing companies to more easily hedge foreign exchange risk.

Massive QE by the U.S. should favour the yuan's global status, he said, noting that the currency's increasing international prominence should be a natural process rather than one driven by policy makers.

But China should reduce its huge holdings of dollar assets by increasing imports in line with the government's "dual circulation" strategy, or by diversifying its foreign exchange reserves.

"It is unwise to hold so many U.S. IOUs," Yu said.