China to Choose Fiscal Stimulus Over Reforms to Revive Economy
China’s Approach to Economic Recovery
China is planning to implement fresh fiscal stimulus measures to support its economic recovery. However, these measures rely heavily on debt and state spending, rather than the deeper reforms advocated by analysts. Some government advisers are suggesting that China should increase its 2024 budget deficit target beyond the current 3% of GDP. This would allow Beijing to issue more bonds and stimulate the economy. While China’s third-quarter growth exceeded expectations, concerns remain about the decline of the private sector and the lack of long-term reforms necessary for consumer-led growth.
Stimulus Measures and Growth Outlook
China’s parliament is expected to approve additional sovereign debt issuance of over 1 trillion yuan ($137 billion). These funds will likely be used for water conservancy and flood prevention projects, in addition to the anticipated front-loading of 2024 local bond quotas. The aim is to sustain the fragile economic recovery and prevent any potential economic disaster. Despite the positive growth outlook, an anonymous cabinet adviser cautioned that the foundation of economic recovery is not yet solid, emphasizing the need for policies to stabilize growth and setting a 5% GDP growth target for next year.
Reforms and Future Challenges
China’s post-pandemic recovery has highlighted structural constraints and the urgency for reforms that promote sustainable growth. While some government advisers advocate for reforms that go beyond property and infrastructure investment, near-term needs have overshadowed more ambitious changes. Economists stress the importance of policies that encourage urbanization, boost household spending power, reduce investment reliance, and level the playing field between state-owned enterprises and private firms. Without these reforms, China risks prolonged deflation and stagnant growth that fails to improve living standards for its 1.4 billion population.
Policy Focus and Limitations
Current policy focus centers on increasing fiscal and monetary support to combat the economic challenges. Local governments have been instructed to complete the issuance of the 2023 quota of 3.8 trillion yuan in special local bonds by September to fund infrastructure projects. Experts believe that the central government has room for increased spending, as its debt-to-GDP ratio is only 21%, significantly lower than the 76% ratio for local governments. However, the central bank’s ability to further ease monetary policy is limited due to concerns about capital flight and the stability of the yuan.
Political Environment and Reforms
While more fundamental changes, particularly market-based reforms, are necessary, policy insiders believe that the current political environment will limit their implementation. The state’s increased control over the economy, including the private sector, may hinder the revival of market-based reforms. Expectations for the upcoming Communist Party plenum, traditionally focused on reforms, may disappoint those hoping for substantial changes. Despite the need for reforms, their successful implementation requires significant political will and overcoming structural challenges.
Note: The Chinese yuan exchange rate is approximately 7.2987 yuan per US dollar.