MNI INTERVIEW: PBOC Must Stoke Inflation, Target 4% CPI

The People's Bank of China should further expand its balance sheet to lift inflation and allow the yuan to appreciate gradually, otherwise the undervaluation of Chinese assets will continue to erode household wealth and worsen China's debt burden, a prominent economist and policy adviser told MNI, arguing Beijing should target CPI annual growth at 4%.

Xiao Geng, associate dean of the School of Public Policy at the Chinese University of Hong Kong, Shenzhen, said a 4% CPI target would help offset excessive declines in asset prices following China's prolonged period of deflation. While persistent overcapacity would make achieving such a target difficult, he argued it would encourage the PBOC to act more proactively and push inflation closer to 2%.

China recorded 1.2% y/y CPI growth over April against Beijing's 2026 target of “around 2%”.

Xiao noted the country needs sustained inflation to restore balance between assets and liabilities, as the former – including real estate, stocks and the yuan – remain undervalued. Given the high debt levels of households, corporations and local governments, shrinking asset values expose China to insolvency risks, he warned.

The PBOC should learn from the U.S. Federal Reserve and refocus on inflation rather than place excessive emphasis on structural issues, said Xiao, who also serves on the expert team of the Hong Kong Chief Executive's Policy Unit. The central bank should act early because advances in artificial intelligence are likely to lower technology and labour costs, adding to deflationary pressures even as they boost productivity. (See MNI PBOC WATCH: Softer Economy To Push H2 Policy Easing）

Recent cost-push inflation driven by higher commodity prices, including crude oil, has helped lift inflation expectations, but it remains far from sufficient to revalue assets. Higher input costs also weigh on corporate profitability, added Xiao, who also chairs the Hong Kong Institution for International Finance.

While the PBOC should expand its balance sheet, further interest-rate cuts are less necessary as excess capacity and weak confidence mean lower rates would do little to stimulate investment or consumption. Instead, policymakers should increase the money supply and encourage fiscal spending, he said.

BALANCE SHEET EXPANSION

The PBOC has expanded its balance sheet much more slowly than major central banks in recent years, Xiao continued. While the Fed’s quantitative easing boosted dollar-denominated assets, including equities and real estate, China fell into deflation, increasing the risk of capital outflows.

The U.S.-China interest-rate differential could widen further and intensify capital outflow pressures should the Fed resume raising interest rates before China emerges from deflation, he warned. China's large trade surplus and deflationary environment have left the yuan undervalued, discouraging international investors from holding yuan-denominated assets and slowing the currency's internationalisation, Xiao said.

While allowing the currency to appreciate gradually, the central bank should expand yuan settlement in trade with China and strengthen the currency's role in pricing and settling commodity transactions, including rare earths. China's manufacturing strength and trade advantages create enormous potential international demand for the yuan, which could absorb much of the additional liquidity generated by accommodative monetary policy, he added. (See MNI INTERVIEW: China 2026 Export Growth To Support Yuan)

MONETARY EXPANSION

Xiao said it is difficult to estimate how much monetary expansion would be required to raise inflation because uncertainty surrounds both monetary-policy transmission and the effectiveness of funds raised through government bond issuance.

Household income and wealth expectations remain weak, meaning structural and industrial policies, including measures to boost consumption, are unlikely to generate strong domestic demand without a larger PBOC balance sheet and a significant increase in treasury issuance, Xiao said. He argued insufficient policy expansion helps explain why previous efforts to stimulate demand have produced only limited results.

Although GDP growth remains stable, slowing growth in household income and wealth suggests the broader economy is still losing momentum, with few convincing signs of a rebound, he said. Because households hold much of their wealth in real estate, policymakers have recognised the need to stabilise housing prices and have already taken supportive measures. Xiao said the worst phase of the property downturn has likely passed and prices in first-tier cities have started to stabilise, but called for further nationwide support, including the complete removal of home-purchase restrictions.