How China is moving to boost demand and achieve higher growth
- China remains well-positioned to achieve much higher growth than most developed economies. The key is to move away from its conservative approach over the past decade, towards expansion
The key to success lies in policy: while staying the course of reform and opening up, China must use fiscal and monetary levers to respond to growth and price data. Should both growth and inflation be sluggish, fiscal and monetary expansion are in order. Conversely, if inflation rises sharply, a tightening should follow, even if it results in lower growth.
Meanwhile, China’s GDP growth rate has been on a consistent decline, falling from 12.2 per cent in the first quarter of 2010 to 6 per cent in the fourth quarter of 2019. From 2020 to 2022, China’s average annual growth rate was about 4.6 per cent. Amid this combination of weakening growth and low (or even negative) inflation, the case for growth-boosting fiscal and monetary expansion is strong.
Over the past decade, however, the Chinese authorities have taken a cautious approach to growth, setting annual targets a few basis points below the previous year’s actual growth rate. The government argues that keeping growth targets conservative affords it more space to pursue reforms aimed at upgrading China’s growth pattern and improving the quality and efficiency of economic development. But whether the pursuit of higher GDP growth would actually impede this effort is a matter of debate.
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What is clear is that China’s government is committed to limiting fiscal imbalances. That means keeping government bonds below 60 per cent of GDP, and the budget deficit below 3 per cent of GDP – often by a significant margin. While the budget-deficit-to-GDP ratio stood at 2.8 per cent of GDP in 2009, it was cut to 1.1 per cent in 2011, as the government rushed to exit its 4 trillion yuan (US$555 billion) stimulus cycle.
As the government has pursued a cautious fiscal policy, the People’s Bank of China has been juggling too many objectives: economic growth, employment, internal and external price stability, financial stability, and even allocation of financial resources.
In particular, it has had to respond to the cyclical changes in the housing price index: if the index rises sharply, the PBOC pulls back the monetary policy reins. More broadly, the PBOC has committed not to pursue “flood irrigation” – that is, flooding the economy with liquidity – but instead to stick to a “precision drip irrigation” approach.
Undoubtedly, China could have achieved higher growth over the past decade with a more aggressive macroeconomic policy approach. While it is too late to change the past, China can still achieve a more dynamic future, but only if it implements a carefully designed fiscal and monetary expansion focused on boosting effective demand and, ultimately, growth.
This is perhaps the most important change to China’s macroeconomic policy guidelines in recent years. If the Chinese authorities translate it into effective policy, higher and more stable growth will follow.