To jump-start China’s sluggish economy, Beijing needs to use all its fiscal and monetary policy tools
- Yu Yongding says the Chinese central bank can’t devise an effective monetary policy when it is juggling too many tasks, including keeping the yuan stable. Beijing can’t obsess about currency stability when it needs to prevent a financial crisis
Although a slowdown was inevitable in China after four decades of breakneck growth, Beijing should try to stop further deceleration this year. Otherwise, China’s economic, financial and social stability will be jeopardised. This can be achieved if the government adjusts its macroeconomic policy.
Begin with monetary policy. The People’s Bank of China is currently responsible for – at a minimum – maintaining the stability of economic growth, employment, prices and the exchange rate. That is too many objectives to pursue simultaneously, as evident from sudden and frequent monetary-policy reversals.
Since late 2011, the PBOC has changed its policy stance four times, in response to fluctuations in housing prices. But its manoeuvres have often undermined its other objectives. For example, while tightening monetary policy can rein in runaway housing prices, it compounds the growth slowdown.
In fact, monetary tightening might not even be called for. Though many argue that the PBOC’s past liquidity injections – especially its large stimulus in response to the 2008 global economic crisis – caused the real-estate bubble, housing prices began to skyrocket long before. Indeed, it is not at all clear that increasing the money supply raises prices. It may even work the other way around: because rising housing prices have absorbed too much liquidity, the PBOC has to increase the money supply to support the real economy.
For too long, China’s obsession with currency stability has deprived the PBOC of true monetary autonomy. It is time to move on. Chinese enterprises should have learned by now how to protect themselves from exchange-rate fluctuations. And China maintains capital controls that effectively protect it against an excessively sharp devaluation, let alone a run on the renminbi.
In any event, the more important challenge for China’s leaders is to devise a new approach to fiscal policy. Even US President Donald Trump’s administration, with its limited understanding of economics, recognises that the government has a vital role in strengthening areas in which the private sector has insufficient incentive to invest but which are important to national security and economic stability.
This means China still has room to pursue expansionary fiscal policy, with a focus on reversing the investment slowdown that fuelled the decline in GDP growth in 2018. In the first three quarters of 2018, fixed investment grew by just 5.4 per cent year on year (compared to 7.5 per cent in 2017), largely because growth in infrastructure investment, which accounted for some 27 per cent of fixed investment, plummeted from 19.8 per cent in 2017 to just 3.3 per cent in 2018.
A major concern here relates to the efficiency of infrastructure investments. But the concern that inefficient investments are fuelling debt accumulation can be addressed effectively with better-designed projects and appropriate limitations on the role of local governments.
Expansionary macroeconomic policy alone will not resolve all of China’s problems in the long term. And it undoubtedly carries significant risks. But, given the paramount importance of stabilising growth, the Chinese authorities need to use all of the tools at their disposal.