2 unconventional ideas for how to revive China’s flagging economy
- Instead of being unduly cautious about stimulus, Beijing should learn to avoid allocating it to unproductive sectors
- China’s policymakers could also consider relying on the equity market, instead of property, to unleash household wealth
The real concern is leverage, which increased every time stimulus has been undertaken since the global financial crisis. Beijing’s cautious attitude towards unbridled policy easing is consistent with its desire to keep systemic financial risks at bay.
However, a careful investigation reveals a more complex relationship between stimulus and debt than simple causality.
Changes in leverage – calculated as debt over gross domestic product – are, in fact, more a function of how stimulus is rolled out. If done properly, a productive allocation of resources could in fact bolster output more than debt, leading to what hedge fund founder Ray Dalio calls a “beautiful deleveraging”.
The real question, therefore, is how to implement a stimulus package that maximises the benefits while minimising the costs. To avoid the side effects caused by the old playbook, Beijing needs to think outside the box and break some stereotypes. The goal here is to both bolster near-term growth and rebalance the economy, so that a self-sustained recovery can be fostered.
Here are two rather unconventional recommendations. First, when there is limited conventional policy room for manoeuvre, conditions might be ripe for a quantitative easing-like operation. This would require the monetary and fiscal authorities to join forces to support consumption via transfers, coupons and subsidies, much like what Western governments did during the pandemic. This would, for sure, sound controversial to many in China’s policy circle where prudence is considered a virtue and quantitative easing a taboo.
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Reviving the property market could be a solution, but Beijing may not wish to kick the real estate can down the road. Rather, it is more appealing to replace property as the key policy transmitter, and the equity market may be well suited to playing this role.
A clear signal of support, together with the necessary reforms, could help to re-rate equity markets from their historically cheap valuations. This will help restore investor confidence, drain deposits from banks and boost consumption via wealth creation. A sustained equity rally can help redirect household wealth from real estate to financial assets that contribute to more balanced household portfolios over time.
Further, relying on the equity market, instead of property, for credit intermediation can better ensure resources are channelled into more productive parts of the economy, supporting innovation and consumption, instead of propping up ailing industries that end up exacerbating overcapacity and leverage.
In short, the Chinese economy is in a precarious place. With the private sector in danger of falling into a balance sheet recession – as Japan did after the burst of the bubble in the 1990s – Beijing needs to expand its own balance sheet to avert an “ugly deleveraging”, with output on a downward spiral. Time is of the essence, and the authorities need to move fast and decisively to prevent a repeat in China of what has plagued Japan for decades.
Aidan Yao is a macroeconomist with more than 15 years’ experience in both public- and private-sector organisations