How can China remedy deflation risks without ditching long-held economic strategy?

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Persistent risks of deflation and a weakened banking sector may compromise the effectiveness of China’s monetary policy. The International Monetary Fund has urged Beijing to find new means of maintaining economic growth. S&P Global Ratings projected that the non-performing assets ratio for Chinese commercial banks would rise to 5.75% in 2026. The PBOC's monetary policy committee plans to guide large banks to play a main role in the 'real economy' while encouraging small to medium-sized banks to focus on their 'main business'. Analysts have warned of a potential liquidity trap. Yang Delong, chief economist at the First Seafront Fund, suggested that the PBOC could consider buying treasury bonds and local government bonds to boost market confidence. President Xi Jinping has called on the PBOC to gradually increase the trading of treasury bonds in its open market operations. Guan Tao, global chief economist at Bank of China International, said that more trading of government bonds from the PBOC could improve liquidity in the market. The PBOC is in a 'tricky situation' as it seeks to balance having a stable currency with a looser monetary policy. China has been battling low inflation, with its consumer price index growing by only 0.2% in 2023. China's producer price index declined in March by 2.8% year on year. Peng Wenshang, chief economist of CICC, said that one way for the PBOC to bring down real interest rates is to raise expectations of inflation through the purchase of government bonds.

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