China seeks to limit unexpected economic risks with ‘fallacy of composition’ warning
- Study Times, a publication under the Central Party School of the Communist Party of China, warned of a ‘fallacy of composition’ phenomenon
- It said the pursuit of individual department policy goals could ‘lead to unintended disruptions to the economy and hit market expectations’
A key Communist Party publication on Wednesday warned that a zealous pursuit of individual department policy goals, despite their good intentions to honour Beijing’s guidelines, could backfire and bring “unexpected risks” to the economy.
The “fallacy of composition” phenomenon was raised by a front-page commentary by the Study Times, a publication under the Central Party School.
“The various policies introduced by each department to achieve their own goals sometimes have generated overlapping effects. If excessive force is applied, it could generate a strong contraction effect,” the commentary said.
“[It] may lead to unintended disruptions to the economy and hit market expectations.”
In the past decade, ministries and regional authorities have rolled out policies that were within their policy domains, but turned out to be highly controversial, including forced closure of factories to achieve environmental and energy-saving targets.
China is expected to set a growth goal of around 5 per cent for its gross domestic product in 2024.
Despite being unchanged from this year’s target, a vanishing base effect, external uncertainties and lingering weakness in consumer and investor sentiment creates an uncertain outlook.
It was followed by a Ministry of Public Security meeting on Friday, which also vowed to build “combating capabilities” in economic crime investigations.
But such messages seem “incongruous” with the pro-growth and pro-business tone of the economic work conference, said a Shanghai academic who declined to be named due to the sensitivity of the matter.
The top leadership has requested incorporating non-economic policies into the overall assessment to enhance consistency in macroeconomic management.
The mention of security and combating capabilities could provoke the fragile nerves of investors, said the academic.
As a lack of investment continues to haunt China’s business environment, the Study Times stressed policy consistency and communication with entrepreneurs to guide expectations and avoid shocks.
When growth is trending down, we should have less contractionary policies to avoid the composition effects that may become a drag on the economy
“Entrepreneurs need to be consulted when the government designs policies, plans and standards,” said the commentary, urging transitional arrangements for new policies as well as a policy risk assessment mechanism.
“[The government] should avoid emergency braking or U-turns in policymaking.”
The article also cautioned against cramming the execution of long-term objectives into a short timespan, and that policies should be adjusted to suit changing economic cycles.
“When growth is trending down, we should have less contractionary policies to avoid the composition effects that may become a drag on the economy,” it added.
