An influential Chinese central bank adviser delivered a rare critique of his nation’s economic policy, urging the government to address weak consumer spending and set a compulsory target for inflation.

Authorities should change their strategy of “focusing on investment and neglecting consumption”, said Huang Yiping, a member of the People’s Bank of China’s (PBOC) monetary policy committee, according to an article published this week, which cited his earlier speech in May.

“The economy has entered a new stage and the total demand - including consumption, exports and even investment - is no longer as strong as before,” said Huang. “This actually poses new challenges to macroeconomic policies.”

Cash handouts to households and granting migrant workers better access to urban public services would boost consumer spending, Huang said. 

Rebalancing China’s two-speed economy has been a challenge as authorities lean on manufacturing to propel growth while risking a backlash by creating a global glut of exports. 

The transcript of Huang’s speech was only released in the wake of the Communist Party’s twice-a-decade meeting on reforms that left investors disappointed. The Third Plenum proposed few solutions to the economy’s most pressing problems, as top leaders reaffirmed manufacturing as the centerpiece of the economy, despite rising trade tensions.

Huang’s frank assessment comes as public critiques of Chinese government measures have become increasingly fraught as policymakers struggle to arrest a slowdown. Analysts have been advised to avoid discussing sensitive terms such as “deflation” or expressing views deemed overly negative for the economy.

Hu Xijin, a former editor-in-chief of China’s state-backed Global Times, was banned from posting on social media after he wrote controversial comments about the economy, Bloomberg reported on Thursday, citing a person familiar with the matter.

The blackout was triggered by Hu’s assessment that last month’s plenum signalled a “historic” shift in putting public and private enterprises on an equal footing, the person said, adding that authorities want to limit discussion about that topic.

Without using the word “deflation”, Huang highlighted falling prices as an issue requiring greater attention, and advocated for setting a hard target for China’s consumer price index to increase by 2% to 3%. Policymakers have consistently aimed for inflation at 3% in the past, but it’s regarded as a celling, not necessarily something that must be achieved.

Unlike other central banks like the US Federal Reserve (Fed) - which has a long-run target of a 2% inflation rate in order to promote maximum employment and price stability - the PBOC has to balance multiple goals, such as ensuring stability of the yuan. 

“The economy is now easy to cool but difficult to heat up,” said Huang, who’s also the dean of the National School of Development at the Peking University. “If it really falls into the low inflation trap, the consequences will be serious.” 

After China extended its longest deflationary streak since 1999 last quarter, Huang raised the question of whether the world’s No 2 economy could fall into the same cycle as Japan, which suffered decades of deflation and was referenced more than a dozen times in his remarks.

Huang was careful to strike a constructive tone in his lengthy speech, with the government’s policies only characterised as being “mild” and “new conditions emerging in the economy” blamed for measures having a weaker effect than desired. China’s home sales slumped again in July, despite Beijing unveiling this year its most forceful efforts yet to support the property market that’s suffering a prolonged crisis.

According to Huang, two popular views were hindering policies. One was the belief that only structural reform can lift productivity, and the second was an aversion to adopting the more aggressive policies taken by Western countries.

Massive stimulus unleashed by the US and Europe in recent years had effectively supported those markets, without triggering significant negative consequences, added Huang, who has worked at investment banks including Citigroup Inc and Barclays plc.

Huang returned as a PBOC adviser this year after serving in that role between 2015 and 2018. He’s previously called for the PBOC to cut interest rates even as the Fed began to hike, and flagged the risk of overseas pushback on China’s industrial policies.

Huang said both the central bank and the Finance Ministry were trying to preserve future policy space. Too conservative measures could threaten longer-term economic stability, he added.

Pressure on the balance sheets of households, businesses and local governments is feeding the economy’s weakness, according to Huang. This means the central government needs to shoulder more responsibility and stabilise confidence, he said.

“If the deteriorating trend is not stopped, it can lead to very serious consequences.”

  - Bloomberg