Navigating China’s Economic Debate: Stimulus or Reform?
China's economic challenges have sparked a vigorous debate among government advisers. On one side are those championing structural reforms, while others advocate increased state spending to rejuvenate the flagging economy.
This unusual discourse unfolds against a backdrop of global market uncertainties, with investors and observers eagerly seeking insight into China’s strategy for economic recovery.
Recent incremental support measures from Beijing have fueled discussions about the critical choices facing China’s new economic leadership—prioritize immediate relief or implement long-overdue structural reforms.
Proponents of immediate stimulus argue that with its low debt, China’s central government can partner with local governments to finance infrastructure and spur economic activity. Conversely, reform advocates argue that the stimulus policies that drove past growth have reached their limits, necessitating more profound structural changes.
Both sides stress the urgency of their proposals in anticipation of the annual Central Economic Work Conference scheduled for December.
Influential government economist Yu Yongding emphasizes the need for “more robust stimulus policies and a comprehensive package of macroeconomic measures.” Given concerns about capital flight and yuan depreciation, China’s central bank faces constraints in easing monetary policy.
At 21% of GDP, the central government’s debt is substantially lower than the 76% held by local governments, with a 2023 budget deficit target of 3.0% of GDP.
Proponents of reform called for accelerated structural changes, including relaxing residence permit restrictions (“hukou”) and removing barriers for private companies. Some advocate restarting stalled market reforms amid increased state intervention.
The International Monetary Fund’s Managing Director, Kristalina Georgieva, advises China to boost domestic consumption, curb local government debt, and address issues in the property sector.
However, some advisers argue that policy stimulus is ineffective. Liu Shijin, an adviser to the central bank, stresses the importance of reforms to unlock the spending power of urban migrant workers, a view shared by former central bank head Yi Gang.
Despite the debate, analysts believe Chinese leaders can navigate between stimulus and reforms.
Rob Subbaraman, Chief Economist at Nomura, highlights the trade-off: short-term stimulus can boost growth but exacerbate structural imbalances, while structural reforms may bring short-term challenges but yield higher-quality, sustainable growth.
China’s second-largest economy shows signs of stabilization after modest policy interventions. Nevertheless, challenges loom, including a property market slowdown, an aging population, rising debt, and geopolitical tensions.
Proponents of reform argue that structural changes are crucial to restoring confidence in China’s economy, particularly in the private sector. Economist Yi Xianrong, a former government adviser, stresses the need to return to Deng Xiaoping’s foundational principles, asserting that foreign investors lack confidence without these reforms.