China is risking economic stagnation with its half-hearted stimulus measures

China must not allow its GDP growth rate to fall below 6 per cent, or the economy may be stuck on a low-growth track
Policymakers should step up investments, splash out on needed infrastructure and be generous with both fiscal spending and monetary easing

G. Bin Zhao

Published: 1:00am, 20 Dec 2019

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Japanese Prime Minister Shinzo Abe recently announced the launch of a US$121 billion stimulus package, but China is still hesitating to do something similar. As a result of the global economic slowdown and weakening domestic demand, China’s GDP growth rate fell to 6 per cent in the third quarter of this year, the lowest since records began in 1992. Markets are worried that the world’s second-largest economy – a major contributor to the global GDP – might continue to decelerate.

Should China allow its growth rate to slide below 6 per cent in 2020? The question is complicated, but I believe it is absolutely crucial to maintain a slightly higher growth rate for now, simply because once the economy decelerates, it may not be able to recover for a long time.

China’s economic growth has been falling gradually for almost 10 years. It is vital to reverse the trend to ensure healthy and sustainable growth in the longer term. In light of its major accomplishments in the past few decades, while it is still a developing country, China has great potential to narrow the gap with advanced economies. Its annual per capita nominal disposable income in 2018 was only a little over US$4,000, or less than 10 per cent that of the US.

If policymakers do not implement the necessary countermeasures now, the economy could get stuck on a track of lower growth.

There have been several examples of economic policy slippage. For instance, the late and insufficient adjustment of the one-child policy accelerated population ageing and affected the nation’s population structure. So, if China wants to maintain growth at above 6 per cent in the next few years, it is necessary for the government to take action now.

What kind of policy measures could help China stabilise its economic growth at 6 per cent or above for a few years from 2020? In another words, how could we prevent China’s L-shaped slowdown from declining further?

First, there is still enormous potential for investments to grow. In the first three quarters of this year, investment increased by only 5.4 per cent and contributed about 19.8 per cent to GDP growth, according to the National Bureau of Statistics. This was a big drop from just five years ago, when its contribution was 48.5 per cent. And, 10 years ago, to combat the economic slowdown triggered by the global financial crisis, investment contributed a whopping 92.3 per cent to growth.

Clearly, investment has played an essential role in developing China’s economy, and it should continue to do so, not necessarily in real estate, but in infrastructure and other sectors that need a boost.

Second, China’s infrastructure is far from mature. For example, the tap water in many areas, even in major cities, still does not meet the drinkable water standards recognised by the World Health Organisation.

The Danjiangkou reservoir in Nanyang city, Henan province. Despite progress in recent years, drinking water in many parts of China still fails to consistently meet safety standards. Photo: Xinhua

Shanghai, which plans to complete the reconstruction and repair of its water pipe network by 2030 to raise the quality of its tap water, has invested about 15 billion yuan (US$2.14 billion) this year alone on major water supply projects. If the central government sets a goal for the whole country to have drinkable tap water, this would probably require 1 trillion yuan in investment, as shown by the experience of Shanghai.

Third, China can continue to increase fiscal spending. One reason for the slower investments, especially infrastructure investment, is that some local governments lack funds. The central government should further increase fiscal spending.

For 2019, China has lifted the fiscal deficit target to 2.8 per cent of GDP, an increase of 0.2 percentage point compared to 2018, but it could do more. Its debt levels, including government, corporate and household debt, are low compared to many other countries, yet it has been one of the fastest-growing economies over the past few decades. This means China is able to afford a much higher debt level.

Is China serious about cracking down on its mountain of debt?

As Professor Yu Yongding of the Chinese Academy of Social Sciences pointed out, past experience shows that a better way to deleverage is to raise the GDP growth rate, rather than to cut loans to enterprises, which may cause more problems than it solves. Therefore, increasing government debt and expanding fiscal spending at both the local and central levels would be a safe option to further stimulate the economy.

Lastly, China can adopt ultra-low interest rates and more quantitative easing when needed. After the global financial crisis in 2008, the US, the EU and Japan implemented ultra-low rates and QE, which has lasted nearly a decade. Comparatively, during the same period, China’s interest rates were much higher, so enterprises and households were bearing higher costs.

To conclude, taking serious policy action once economic growth declines to 5 per cent might be a poor choice for China. What would happen if policy measures do not work effectively at that time? Would that lead to an even lower growth rate? If so, many financial indicators would worsen, and the economic situation might be difficult to control.

China should not allow its growth to slow to below 6 per cent in 2020 and perhaps into the next few years.

G. Bin Zhao is a senior economist at PricewaterhouseCoopers China and he also leads the firm’s China Strategic Research. This article was inspired by a seminar discussion with Professor Yu Yongding. The opinions expressed here are the author’s own

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