Opinion: China Can’t Juice Its Economy Without Increasing Its Deficit

Yu Yongding, a member 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.

China’s economy will likely grow 2% to 2.5% this year, which may not be reassuring.

Hit hard by Covid-19, China’s economy shrank 6.8% year-on-year in the first three months of the year, but returned to a 3.2% year-on-year growth rate in the second quarter. As the potential growth rate of China’s economy is around 6%, we can suppose that GDP growth rates of the next two quarters will be around 6%.

Although the central government has not set a GDP target for this year, it proposed creating more than 9 million urban jobs in 2020. To hit this target, the economic growth rate for the entire year needs be at least 3%, maybe as much as 4%. In other words, if China’s economy ends up growing by 2% this year, it means the government will have failed to reach its job creation goal.

To understand economic growth, we need to look at its three pillars: consumption, exports and investment.

Firstly, consumption will broadly recover, but a particularly strong rebound is impossible. This year, consumption may not be a significant factor driving China’s economic growth. Amid the pandemic, people spent much of their savings, which they now seek to replenish. Also, because both their current income and future income expectations may not be that high, people will not be rushing to spend money.

Secondly, although exports have exceeded expectations, net exports account for quite a small share of GDP. The figure was less than 1% in 2018. Even if net exports grow at a relatively high rate, they won’t contribute much to economic growth.

What counts most is investment. Despite the improving property market, the government has sought to curb real estate investment growth to ensure the stability of the market.

Another aspect is infrastructure investment. To boost economic growth, the government should increase investment in infrastructure construction by issuing bonds to raise funds. However, this would cause an increase in the fiscal deficit.

So, it’s an either-or choice between economic growth and a deteriorating fiscal position. Amid the pandemic, I prefer to address China’s currently slow economic growth in the short term. There may be severe fallout from adopting massive stimulus and expanding deficits, but we don’t know what will happen in the future. So we should solve the current problem first, and then think about the future.

Take Japan as an example. From 1996 to 1997, the Japanese government adopted a belt-tightening policy to keep its fiscal deficit in check, but that only made its fiscal position worse. Even as its government debt has grown to more than 200% of GDP in recent years, Japan continues to employ stronger fiscal stimulus, which has only led to an economic slowdown and deflation. Still, the expected fiscal crisis never materialized. This has also been the case for many Western countries.

This commentary, based on Yu Yongding’s speech at a forum in Shanghai on Friday, has been edited for length and clarity.

Translated by Luo Meihan

Contact editor Michael Bellart (michaelbellart@caixin.com)

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