The immediate priority is to stimulate and stabilize total demand as soon as possible, to restore overall prices and employment rates to a reasonable level.

"To boost effective demand, China must use expansionary fiscal and monetary policies to stimulate the economy," said Yu Yongding, an academic advisor to the China Finance 40 Forum (CF40), chairman of the Pu Shan Foundation, and a member of the Chinese Academy of Social Sciences, at the 2024 Sixth Bund Financial Summit held from September 5th to 7th.

He is not the only one who holds this view.

Gao Shanwen, Chief Economist at SDIC Securities, said at another forum that the current situation in China is still relatively prominent in terms of insufficient total demand.

In his view, in the third and fourth quarters, the further weakening of total demand may still be the dominant risk in the macroeconomy.

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"The real issue is the diagnosis of the insufficient total demand situation and policy recommendations," he said.

On September 9th, data released by the National Bureau of Statistics of China showed that in August, China's Producer Price Index (PPI) fell by 1.8% year-on-year, contracting for the 23rd consecutive month.

However, in the same month, the Consumer Price Index (CPI) rose by 0.6% year-on-year, increasing for the seventh consecutive month.

Yu Yongding further stated that effectively solving the total demand issue can not only alleviate the pressure on China's export sector but also help to ease the pressure on the United States and other countries.

At the same time, this also helps to reduce the controversy over the appreciation of the renminbi.

A long-term surplus in the current account is not beneficial to China and does not conform to China's long-term interests.

According to data from the National Bureau of Statistics, in August, China's PPI fell by 1.8% year-on-year, contracting for the 23rd consecutive month.

The CPI rose by 0.6% year-on-year, increasing for the seventh consecutive month, but the increase was lower than the 0.8% forecasted by economists surveyed by the market.

(China's CPI, PPI year-on-year changes, data source: Wind) Looking at other indicators, Wind (Wind Information) data shows that since the second quarter of 2023, China's Gross Domestic Product Deflator (GDP deflator) has been negative for five consecutive quarters year-on-year, indicating that the downward pressure on prices continues to exist.

The GDP deflator, also known as the GDP shrinkage index, is defined by the National Bureau of Statistics as the ratio of GDP without deducting price changes to GDP with price changes deducted, mainly used to analyze changes in the overall price level.

In Gao Shanwen's view, there are two different views on the current issue of insufficient total demand.

First, the current insufficient total demand is the cost of transformation, that is, the economy needs to shift from growth driven by machinery and real estate to high-quality growth driven by high-end manufacturing and modern services, and it needs to go through a period of pain.

Second, from the perspective of total demand management, the immediate priority is to stimulate and stabilize total demand as soon as possible, to restore overall price levels and employment rates to a reasonable level.

Managing short-term total demand fluctuations can be separated from economic structural transformation.

"Economic transformation is like driving on a highway.

Sometimes you need to turn, which is equivalent to economic transformation.

When turning, you need to slow down, because if you maintain a very high speed, it is not safe, and it is very likely that you will not be able to turn.

But if the speed is too low, it will also cause many problems," he further stated, "The current situation of insufficient total demand is obviously related to economic transformation.

In the process of transformation, is our speed just right, or is it still at a relatively low level compared to the demand for transformation?

This requires a broader range of evidence.

Since the second quarter of this year, consumers have shown a relatively broad deceleration in consumption spending."

Yu Yongding believes that China's problem is insufficient effective demand.

Therefore, China must use expansionary fiscal and monetary policies to stimulate the economy.

On September 5th, Zou Lan, Director of the Monetary Policy Department of the People's Bank of China, stated that policy adjustments such as reserve requirement ratio cuts and interest rate cuts still need to observe the economic trend.

Among them, the statutory reserve requirement ratio is a tool for us to supply long-term liquidity, compared with which, the 7-day reverse repo and Medium-term Lending Facility (MLF) are tools for short-term liquidity fluctuations, and this year, a government bond trading tool has been added.

The comprehensive use of these tools aims to maintain a reasonable and sufficient liquidity in the banking system.

The policy effect of the reserve requirement ratio cut at the beginning of the year is still continuing to show, and the average statutory reserve requirement ratio of financial institutions is currently about 7%, with some room for further reduction.

However, Zou Lan also warned that due to factors such as the speed of bank deposits flowing to wealth management products and the narrowing of bank net interest margins, further downward pressure on deposit and loan interest rates still faces certain constraints.

From the fiscal perspective, Wind (Wind Information) data shows that from January to August, the scale of local government bond issuance in China was about 5.4 trillion yuan, a year-on-year decrease of 14%.

Yu Yongding believes that effectively solving the total demand issue can not only alleviate the pressure on China's export sector but also help to ease the pressure on the United States and other countries.

Customs data shows that from January to July, the total value of China's goods trade imports and exports reached 24.83 trillion yuan, a year-on-year increase of 6.2%.

Among them, exports were 14.26 trillion yuan, a year-on-year increase of 6.7%; imports were 10.57 trillion yuan, a year-on-year increase of 5.4%.

Lv Dayang, Director of the Statistical Analysis Department of the General Administration of Customs, stated that since the beginning of this year, China's economic operation has been generally stable and progressing steadily, and foreign trade has maintained a stable and positive trend.

In the first seven months, China's import and export scale set a new high for the same period in history, and the import and export in July both increased year-on-year and month-on-month, with the year-on-year growth rate maintaining above 5% for four consecutive months.

However, in the view of some market participants, whether this situation will continue under the background of weak overseas demand is still to be observed.

"From the internal environment, due to the current export to a certain extent 'sprinting ahead', there is a high degree of uncertainty about whether China's foreign exports can continue to maintain a strong momentum in the fourth quarter and next year.

In addition, if the result of the U.S. election makes the risk of tariffs rise significantly, this will bring significant pressure to domestic economic growth and the renminbi exchange rate," said Wang Lisheng, economist at Goldman Sachs China.

Data released by the U.S. Department of Labor shows that in August, the U.S. non-farm employment increased by 142,000 positions, slightly lower than expected.

The unemployment rate fell to 4.2%, ending the trend of rising for four consecutive months.

Yu Yongding believes that from a macroeconomic perspective, China does not have overcapacity.

"In industries such as electric vehicles and lithium batteries, some issues need to be solved by market mechanisms," he said.

In a conversation with Yu Yongding, C. Fred Bergsten, founder of the Peterson Institute for International Economics, also said that if China is producing a large number of electric vehicles, China may think that this is developing its own competitive advantage, while the United States and other countries may think that it is overcapacity.

Producing to meet both domestic and foreign sales needs is not wrong in itself, and it is not necessarily overcapacity.

In addition, the trade surplus is closely related to the renminbi exchange rate, and the inflow of funds under the trade item has always been a major factor supporting the renminbi.

Yu Yongding believes that if domestic demand is stimulated, it can not only alleviate the pressure on exports but also reduce the debate on the appreciation of the renminbi.

"A long-term surplus in the current account is not beneficial to China and does not conform to China's long-term interests," he said.