Aug 07, 2018 10:22 AM

Editorial: How China Must Balance Transformation, Stability

“Stability” has become the driving concept behind China’s current economic policy.

On July 31, the Politburo met and called for the country to maintain “stable employment, stable finance, stable trade, stable foreign investment, stable investment, and stable expectations,” while requiring that the government work to maintain social stability.

The repeated emphasis on stability sends some strong signals. The strongest signal is that the country’s economic policy, contrary to some people’s expectations, will not undergo a dramatic shift toward comprehensive loosening, but will rather display greater policy firmness. This is something that we should be glad for.

At the moment, the Chinese economy is facing relatively large downward pressure. Global economic recovery has reached its peak, and the U.S.-China trade conflict continues to escalate. It is particularly significant that the Chinese government is emphasizing “stability” at a time like this. It shows that policymakers have a very accurate grasp of the key contradictions faced by the Chinese economy.

Since the start of supply-side reforms, some market participants have from time to time called for or predicted the shift of China’s macroeconomic policy toward comprehensive loosening. The recent policy of “marginal easing” has caused these voices to grow louder, but, actually, new trends are showing the farsightedness and flexibility of policy aimed at preventing secondary risks caused by previous deleveraging and stricter supervision efforts.

Out of the six “stabilities” the Politburo called for, “stable investment,” is toward the bottom of the list, and refers mainly to making sure necessary projects currently in progress don’t get cut off from funding. The reason China cannot engage in an indiscriminate “massive stimulus” is that this is an irreversible choice, which policymakers clearly recognize. To determine whether a macroeconomic policy counts as a “massive stimulus,” we must look at the policy openings of particular time periods, look at accumulated scale, whether a project is beneficial to the economy, if the process is regulated, and whether it is in line with the principle of marketization.

“Stability” doesn’t mean stagnation — China cannot respond to ever-changing circumstances by refusing to change. However, as the Politburo meeting pointed out, at the moment, China’s economic policy is still changing while remaining essentially stable in the face of new problems and challenges, and clear changes in the external environment. In some ways, policymakers are also promoting change even as they emphasize stability.

The Politburo meeting also called for comprehensively promoting supply-side structural reforms, fighting the “three main battles” of risk prevention, poverty alleviation and pollution prevention, accelerating the construction of a modernized economic system, and promoting high-quality development. Without these “changes,” it would be very difficult to achieve the six “stabilities.”

How should China change? The Politburo has suggested a host of measures and has already deeply explored solutions to this problem.

In order to maintain economic stability, China must effectively combine fiscal and monetary policies, and place greater emphasis on structural adjustment, while implementing policies with precision. The latest Politburo meeting called for continued implementation of active fiscal policy while maintaining stable and prudent monetary policy, saying that “fiscal policy should play a greater role in expanding domestic demand and structural adjustment,” and that China should “keep a strong grip on its monetary supply floodgates and maintain a reasonably ample liquidity.”

The meeting also called for continued deleveraging at an appropriate magnitude and speed while coordinating the timing of various policies. This dispels fears that China is giving up on deleveraging without finishing the job. It also shows that policymakers are more concerned with how various policies work together as a whole, to prevent damage to the real economy through overly hasty deleveraging causing too much of a contraction in social credit. In the second half of the year, there will be more room to set fiscal policy than for monetary policy. Working on the premise of maintaining stable and neutral monetary policy, China’s policymakers must apply more active and effective fiscal policy, promote feasible tax cuts, speed up the issuance of special bonds, and appropriately hedge against the impact of credit contraction.

It is important to look beyond short-term goals toward the medium and long term and tackle deep-seated contradictions in the Chinese economy. The Politburo meeting called for the government to see “making up for shortcomings” as an “important task of furthering supply-side structural reforms,” and “increase the strength of making up for shortcomings in the area of infrastructure” while “clearing obstacles against capacity reduction, and lowering the cost of doing business.” In order to achieve these, China must exert more of an effort in revitalizing rural areas and protecting the environment, and in infrastructure, social welfare and other areas where China lags behind. It must also increase its assistance for and nurturing of industries that represent the future of the economy, actively support the development of small and midsize enterprises, and improve the country’s economic structure.

To achieve a “stable” economy, China must also undergo genuine reform and opening-up, and remodel its institutions and mechanisms. The Politburo said that the country should “advance its reform and opening-up, and continue to research and launch a series of useful and effective major reform measures.” It said that “there must be major moves toward the practical expansion of opening up, and significant easing of market access restrictions.” Higher-level plans for reform and opening-up were decided long ago, but the key is in their promotion and implementation.

In order for the policy directions recommended by the Politburo to be truly implemented, some obstacles must be eliminated. For example, due to high-pressure controls on local government debt risk, some local governments have simply resorted to crude measures like ceasing or slowing down work, resulting in an unusual slowdown in the issuance of local government bonds, and a dramatic drop in the growth of infrastructure investment. Whether or not the central government can mobilize the enthusiasm of local governments depends on whether it can straighten out its fiscal relationship with those governments. This reform has gone on for years without a breakthrough, and local governments have been either continuing old bad habits or submitting to dramatically tightened supervision. They are always facing either a capital construction slowdown or a slide into ballooning debt.

The reform of state-owned enterprises also presents a similar problem. Since the third plenum of the 18th National Congress of the Chinese Communist Party, the party’s Central Committee and the State Council have jointly promulgated guidelines, and the State-owned Assets Supervision and Administration Commission has issued over 20 documents on reform, but the country has not made significant headway with reform. There has even been a rise in private enterprises seeking shelter under the “red caps” of state-owned enterprises in an unconventional form of mixed-ownership reform, thanks to strict environmental inspections and private enterprises defaulting on their debts. Because reform departments’ documents are frequently weak and avoid addressing systemic and institutional issues, state-owned enterprises also frequently substitute actual reform with development, whether intentionally or not. A few days ago, the State Council issued an opinion document on trial reforms for state-owned capital investment and management companies. We hope that the leadership of a new State Council leading a small group for state-owned enterprise reform will complete the halting, years-long progress of this aspect of reform, achieving breakthroughs.

The various levels of government should put greater effort into structural adjustment and accelerate reform because this will affect whether China can really achieve stability, and will affect the economy’s long-term stamina. Some people may be waiting to see if the Chinese government will be able to withstand a possible future increase in downward pressure on the country’s economy. This will indeed be a tough test. China wants its economy to operate healthily, achieve successful transformation and upgrading, and smoothly shift toward high-quality development. This undoubtedly requires firm, unwavering and deepened advancement of supply-side reforms. Since “massive stimulus” is out of the question, the key is whether specific, localized stimuli will be able to reach their targets accurately.

Translated by Teng Jing Xuan (

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