The naysayers are wrong about China’s economy. It really is capable of growing much faster
- Many Chinese economists oppose monetary and fiscal stimulus, citing factors like population ageing. But their arguments are far weaker than the case for expansion: whatever the economy’s potential, China is performing below it
These arguments are not entirely unfounded. Actually, I held similar views in the past. But after watching the economy slow quarter after quarter over the past 10 years, I feel strongly that Chinese economists should reassess their orthodox approach to macroeconomic management.
Consider the “new normal” claim. No informed observer would argue that China can recapture double-digit growth any time soon. But it is not at all clear that long-term structural factors have pushed China’s growth potential below 6 per cent. There are no data showing the effects of, say, population ageing on growth. In fact, estimates of China’s potential growth have proved highly unreliable, owing to methodological and statistical problems.
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I did not argue the particular growth rate that China should target because I simply don’t know. My point was that China’s government should intervene to prevent growth from slowing further. And I stand by it.
But is there room for expansionary fiscal and monetary policy? My critics are right that China’s fiscal position is worse than official statistics indicate. What they fail to recognise is that it is still much stronger than that of most developed economies, and even of China itself in the late 1990s, when contingent liabilities, according to the World Bank, reached 74 to 107 per cent of GDP.
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There is one area where my critics are altogether wrong: China still has a tremendous need for infrastructure investment. Beyond the obvious benefits of modern public infrastructure, such investment, when financed through public spending and bond issuance, would crowd in private investment, which has been declining steadily in recent years.
Finally, far from impeding structural reform, monetary and fiscal expansion, by stimulating GDP growth, would facilitate it. Fortunately, there are signs that China’s leaders may pursue such a policy in 2020, though the pace and potency of their plans remain to be seen.
China’s leaders have the power to kick-start a virtuous cycle of growth and development in the coming year. One hopes that the naysayers don’t convince them not to use it.
Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006. Copyright: Project Syndicate