[Economic Daily] Liu Yuanchun, Liu Xiaoguang: Total Social Demand to Be More Effectively Stimulated

China has witnessed a steady drop in price indexes since this year. The consumer price index (CPI) rose by 1.5% year-on-year in February, a drop of 1% from last October, and cumulatively rose by 1.6% year-on-year in January and February, down 0.5% from the previous year. The producer price index (PPI) cumulatively rose by 0.1% year-on-year in January and February, down 3.4% from the previous year; in February alone, the purchasing price index of raw materials (PPIRM) fell by 0.1% year-on-year, registering the first negative growth since October 2016.

In general, CPI still runs within a reasonable range, but as the industry has come to a new destocking cycle, PPI and PPIRM quickly fall and undergo zero and even negative growth. Due regard should be given to the issue of prices in the field of industrial production.

The price fall is definitely associated with factors such as a fall in prices of international crude oil and other staple commodities, and leveled prices of some products with the international level resulting from China’s import expansion policy. Additionally, the Spring Festival caused economic dislocation in January and February. However, based on the variation trend over the past four quarters, especially that the total retail sales of social goods increased by 8.2% year-on-year in this January and February, a drop of 0.8% from the previous year, the current macroeconomic aggregate demand faces certain downward pressure. This also implies that the positioning of monetary and other macro control policies should be adjusted.

On February 22, General Secretary Xi Jinping stressed during the 13th collective learning of the Political Bureau of the CPC Central Committee that efforts should be made to prevent risks based on steady growth, strengthen the role of fiscal and monetary policies in counter-cyclical regulation and maintain economic operation within a reasonable range. At the end of February, M2 increased by 8.0% year-on-year, down 0.1% from the end of the previous year. It should be noted that with structural changes, say, decreasing funds outstanding for foreign exchange, M0 growth remains low and dropped by 2.4% year-on-year at the end of February. Since Q1 2017, M2 growth rate has been lower than the nominal GDP growth rate for nine consecutive quarters, which, if it long lasts, will necessarily have negative effects on stabilization of the total demand.

It is recommended that this year’s money supply should be pre-adjusted and slightly adjusted in a way that restores the M2 growth to the level of the nominal GDP growth, so as to more effectively stimulate the total social demand. Meanwhile, efforts should be made to pay attention to declining M0 and M1 growth rates, diversify channels of money supply by the central bank, expand the decline in reserve requirements for banks, increase supply of Chinese safe assets and deepen the monetary market.

Liu Yuanchun, Vice president of RUC

Liu Xiaoguang: Research Fellow of National Academy of Development and Strategy, RUC

The original article was published at here.