By Li Gu and Casey Hall

SHANGHAI (Reuters) – China’s former central bank governor Yi Gang said on Friday the country should focus on fighting deflationary pressure as the world’s second-biggest economy struggles to lift-off despite a raft of policy support measures.

Yi’s comments came as businesses squeezed profit margins and employees suffered paycuts in the $18 trillion economy, as a property crisis and weak domestic demand weighed on investor and consumer sentiment.

“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,” said Yi, deputy head of the economic committee of the Chinese People’s Political Consultative Conference (CPPCC), at the Bund Summit in Shanghai.

China’s economy expanded 5.0% in the first half of 2024 but growth momentum has waned 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 said, adding that what is important for people is their employment future and income prospects.

The jobless rate for 16- to 24-year olds in China, excluding students, rose to 17.1% in July from 13.2% in the prior 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 said.

China’s central bank has said keeping prices stable and ensuring moderate inflation will be a significant consideration of China’s monetary policy.

The consumer price index (CPI) year-on-year rose only 0.2% on average during January-July. 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.

Investment bank UBS last week revised down its forecast on China’s GDP deflator from 0 to -0.4 for 2024, “as the deeper property downturn leads to lower upstream product prices, weaker consumption demand and increased price competition in general.”

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