In the wake of China’s exit from its zero-COVID strategy, the government has recognized the need to address the economic risks arising not only from supply shocks but from weakening aggregate demand. Doing so will require a shift in macroeconomic policy, which previously focused more on the supply side.
At the same time, after examining the financial risk and environmental costs of the recent boom in the real-estate sector, Chinese leaders have doubled down on their commitment to achieving the long-term goal of structural transformation. As a result, policymakers are seeking to increase the flow of resources to more productive sectors such as emerging technologies.
To be sure, the government has implemented a set of policies to boost domestic demand. But the package is more muted than the aggressive stimulus of 2009-11, reflecting the dilemma facing Chinese policymakers: how to encourage household and business spending without further inflating the real-estate bubble?
The Chinese government would obviously not allow turmoil in the real-estate market to morph into a systemic crisis, and would instead introduce increasing support measures to help stabilize it. More importantly, though, the sector’s downturn serves as a reminder that China must urgently establish a long-term mechanism to ensure a more robust housing market. This will likely prompt China to accelerate the transformation of the real-estate market in order to adapt to the new stage of growth that the economy is entering.
Looking back over the past decade, the Chinese economy has already undergone considerable structural change as part of official efforts to shift toward higher-quality growth. Apart from the damage brought about by the pandemic, much of the economic landscape has fundamentally changed. Sectors and individuals who had grown accustomed to stability and easy profits are increasingly finding themselves in a less certain and more unfamiliar environment.
Throughout this period, the Chinese government has been assessing the challenges facing the economy and systematically changing development policies to promote structural adjustment. Policymakers were able to reach a consensus on abandoning massive stimulus policies to curb asset bubbles, and on striving to maintain a relatively stable monetary environment at the macro level to bolster the real economy.
This explains why China has consistently favored a “cross-cyclical” approach to macroeconomic management, which means taking action sooner, in smaller steps, and with a view to the long term. As former People’s Bank of China Governor Yi Gang noted in an April 2023 speech, China’s interest-rate policy had already shifted before the pandemic, with the PBOC adhering to the golden rule savings rate and the “attenuation principle,” which calls for caution in the face of uncertain circumstances. Avoiding volatile or overshooting interest rates is crucial to suppressing bubbles and creating conditions for balanced growth.
To be sure, maintaining a positive-real-interest-rate environment is not without short-term costs. But China escaped the massive shocks that can arise from the accumulation of asset bubbles. Moreover, despite any short-term setbacks, the government always seems to emphasize upgrading its policies to promote long-term economic development. This is important to bear in mind when trying to understand many of China’s current economic phenomena.
Fortunately, China has not suffered a depression in the past three decades, largely because its leadership has remained highly vigilant about the possible systemic risks of rapid economic growth. The government is also wary of taking big risks out of a desire to protect vested interests.
China has confronted innumerable challenges while pursuing economic growth in recent decades, but the government has largely overcome them by encouraging market agents constantly to adapt and adjust. China’s accession to the World Trade Organization in 2001, for example, did not cause large-scale unemployment, as some had expected. Instead, fears that “the wolves are coming” spurred many sectors of the Chinese economy to become stronger and more competitive.
Seen from this perspective, the Chinese government’s insistence on combining efforts to expand domestic demand with supply-side structural reforms does not come as a surprise.
Copyright: Project Syndicate, 2024.
www.project-syndicate.org
